For some investors, US Treasuries were not offering enough either, and that money moved into sovereign bonds issued by the UK, Germany and the Nordic countries, according to the same data.
Australia relies on foreigners to buy its debt, with emissions skyrocketing amid a growing budget deficit amid a relentless pandemic. The federal government issued $ 847 billion in bonds and state governments about $ 400 billion, according to RBC data.
Japanese individuals and institutions, including life insurance companies, banks, and pension funds, have a long history of investing in Australian dollar bonds, in part because they typically offer higher returns than debt. from the Japanese government, currently paying around zero over 10 years.
The country’s triple A rating according to S&P Global Ratings is also helpful. Australia is one of only 11 countries still enjoying first-rate status of S&P.
“The Japanese investor base has been long term partners and they are a very important investor base for us,” said Robert Kenna, head of financing and balance sheet at TCorp.
“Our key pieces of correspondence and market information are actually translated into Japanese. TCorp, the New South Wales financing arm, does not provide a breakdown of its debt holders by country.
Currency movements also helped sell off, with the Australian dollar slipping so that one dollar hit 78 yen, compared to 85 yen between May and September, encouraging profit taking. “It’s not historically high,” Mr. Thompson said, “but it’s just not really convincing anymore.” In 2017, the Australian dollar briefly exceeded 90.
As recently as last week, Australian Office of Financial Management (AOFM) chief Rob Nicholl said The Australian Financial Review Japanese investors are sensitive to negative spreads between Australia and the United States.
Declining net supply
Another factor is the impact of the Reserve Bank of Australia’s quantitative easing program on the supply of government bonds. The central bank has spent $ 293 billion on bond purchases since 2020 to keep interest rates low and boost investment, and is currently buying $ 3.2 billion in government bonds per week (out of 4 billions of dollars).
But with the AOFM, the financing arm of the federal government, selling $ 2 billion in federal debt per week, that means the RBA is effectively pulling bonds off the market, noted Andrew Ticehurst, rate strategist at Nomura Securities.
“Given that about half of all government bonds are held overseas and Japan is the largest holder outside of Australia, it makes sense that we are seeing net sales from the US. Japan, ”he said.
Relief in sight
A spike in the spread between Australian and US 10-year government bonds could rekindle interest among yield-seeking Japanese investors.
Australian 10-year yields rose on Monday to their highest level since May 20 at 1.718 percent, while their US counterpart climbed to 1.6118 percent, giving a positive spread of 10 basis points.
Global bond yields have risen since September, as inflation may be more persistent than previously thought as an energy crisis raises the cost of oil, coal and gas, and the outlook vastly improved for the global economy through vaccination campaigns.