One central bank's refusal to contemplate negative interest rates is helping set it apart from developed peers and stoking interest in its world-beating bond market.
The Reserve Bank of Australia's reluctance to contemplate life below zero is helping draw the likes of PGIM and J.P. Morgan Asset Management to the nation's $482 billion sovereign bond market. Australia's 10-year bond yield discount to Treasuries flipped to a premium in March as the Federal Reserve slashed borrowing costs, spurring bets U.S. rates would turn negative next year.
Australian bonds are "competitively well supported and they represent a good storehouse of value that requires less of a leap of faith than most developed markets" to invest in right now, said Robert Tipp, head of global bonds and chief investment strategist at PGIM Fixed Income, which oversees $868 billion. Investors should consider going "long Australia on a core basis."
A gauge of Australian bonds is the best-performing among Group of 10 peer equivalents, showing a 9% total return for the second quarter to June 1, according to Bloomberg Barclays indexes. The nation's 10-year yield was trading at 0.97% on Wednesday vs. 0.7% for equivalent Treasuries.
Anchoring demand for Australian bonds is the RBA's pledge to maintain benchmark 3-year yields at the 0.25% cash rate. That's in stark contrast to regional neighbors New Zealand, where the central bank is openly discussing the possibility of negative rates and Japan where they have been below zero since 2016.
"QE measures and the RBA's posturing on negative rates are helping to keep yields positive and that could be attractive for some," said Raymond Lee, a money manager at Kapstream Capital who is long 3-year Aussie bonds as a hedge for riskier credit bets. "Australia has a yield advantage compared to places like New Zealand, which is open to the idea of negative rates, or even the U.S. where the Fed is keeping yields low."