Demand for Australian government bonds falls

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Adding to the weakening Australian dollar meme, ANZ has a note out discussing weakening (although still strong) demand for Australian government bonds.

The recent fall in Australian bond tender bid/cover ratios reflects a small softening in safe-haven demand, increased credit issuance, and investor preference for riskier assets.

We think demand for ACGBs will be upheld and further continued weakness should not be expected.

In any case, credit will continue to outperform, especially semis where spreads continue to narrow. The bid/cover ratios at the AOFM auctions this year (2013) have so far been weaker on average (3.74X) compared to the average ratio observed during 2012 (3.77X). We think demand for ACGBs will nonetheless hold at a decent level and further significant weakness should not be expected.

This calendar year, the AOFM has auctioned AUD600m each of the Jul-17, Jan-18, Apr-23 and Apr-24 bonds, with all but the Jan-18 bond recording coverage ratios below their averages for this fiscal year (FY) (Figure 2). The ranges of accepted yields, however, all remained tight at 0.005%, which still reflects a high demand for ACGBs.

We think the recent fall in bid/cover ratios reflects some softening of safe-haven demand, which has also been reflected in higher bond yields in other core markets such as US Treasuries, German bunds and UK gilts. It likely also reflects a shift in asset allocation to riskier assets, improved US data and the removal of tail risks associated with the situation in the Eurozone (EZ) as highlighted by the outperformance of credit and stocks.

Locally, we are observing rotation by investors into semis, SSAs and other credit products. Another reason for this observed decline has been increased credit issuance. Year-to-date AUD issuance has totalled AUD13.6bn across financial (AUD7.7bn), Kangaroo (AUD5.4bn) and corporate (AUD0.5bn) bonds and the overall risk-on start to the year has likely tempered some demand for sovereign bonds and increased demand for riskier assets.

Full report below.

Rates Insight 110212.pdf

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.