Australia: Government bond foreign holdings fall - ANZ

Research Team at ANZ, notes that the foreign holdings of ACGBs as a share of outstanding debt are at the lowest level since Q2 2009, and their influence on the AUD is also low relative to the post crisis average.

Key Quotes

“Offshore holdings in Australian government bonds continued to ease in Q1 2016. Foreign holdings as a proportion of market value outstanding declined from 63.8% in Q4 2015 to 60.7%, the seventh consecutive fall, and the lowest level since Q2 2009.

The waning interest in Australian bonds in recent years reflects lower returns amid the sharp drop in the AUD and narrowing yield differentials – particularly against US Treasuries. Further, declining FX reserves since late 2014 may also be contributing. Central banks and sovereign wealth funds have been an important buyer of Australian bonds in recent years, but now appear to have reached a peak in their accumulation.

For the AUD this has been important. While it is a crude measure, the impact these flows are having on the currency market has waned significantly. The buying through 2010-13 was a strong contributor to the AUD’s resilience, and its waning influence means that an undershoot of fair value is still likely to occur in this cycle.

Looking ahead, a lower AUD and a narrowing cash rate differential between Australia and the US makes the volatility adjusted spread less attractive as an investment.

A key question is whether the increasing proportion of ultra-low or negative yielding bonds globally will spur demand for Australian bonds. On this note, Japanese flow data is consistent with anecdotes that Japanese investors are shifting their investments out of ACGBs and into spread products (Semis, SSAs) and corporate credit.”