From the WSJ, on international investor’s waning enthusiasm for Aussie government bonds:
The love affair is now cooling as investors sense the end of the global low-rate era. The U.S. Federal Reserve, in particular, is widely expected to raise rates from near zero as soon as September, a move likely to ripple through global bond markets as U.S. markets begin to suck up more of the world’s money.
“The fervent search for yield [in Australia] is done,” said Mr. Whetton, whose view gets support from government data showing foreign investors now own just above two-thirds of Australian government debt. That compares with nearly 80% as recently as three years ago.
…“A weaker Aussie dollar potentially mitigates the attraction,” said Steve Miller, Australian head of fixed income at BlackRock Inc., which manages more than US$4.7 trillion world-wide.
But, say some:
…Australian interest rates have “nowhere to go other than down,” said Robert Mead, a Sydney-based fixed-income manager at Pacific Investment Management Co. with global assets under management valued at US$1.5 trillion. “Rather than Aussie bonds looking on-the-nose, we’d say that on a relative basis they look pretty attractive.”
This is pretty much the dynamic I’ve been describing in the bond market for a couple of years. The short end of the curve is being anchored by a crap economy and more RBA rate cuts. Long end yields are under pressure from the above bearishness on the dollar. That is creating a steep curve which is fallaciously suggesting better growth ahead. Basically the bond market has failed to catch up to Australia’s new reality: that it is now more attached to the Chinese economic cycle than it is the American one. Or, to put it another way, we’re now an emerging market dressed in developed market clothes.
That’s why I’ve suggested those seeking to play the bond market are safer at the short end.
But that trade also has its limits. There will come a point when the entire bond curve comes under a lot more selling pressure. It will be that point in the cycle when interest rates get so low that any upside in holding bonds is negated versus the risk of further currency falls. There is also the inevitable string of sovereign downgrades ahead as possible tipping points to accelerate revulsion.
I mused years ago that that point might be 2% but we’re already there. These days I think of it as around 0.75% but it really depends upon conditions. During the global chase for yield it’s easy to attract capital, when risk turns off it is altogether different.
I still find it hard to imagine that the RBA would be forced to raise interest rates in a down cycle to attract capital to debt markets but you never know.
