Australia: High yielder status comes into question – TDS

In view of the analysts at TDS, if the RBA sits tight while the Federal Reserve continues to hike, then Australia’s status as a high yielder comes into question. 

Key Quotes

“Aside from the occasional outsized maturity (e.g. the June 2016) net bond flows offshore tend to be positive.”

“While consensus claims that benign underlying inflation stays the RBA’s hand, we can’t ignore the fact that Australia’s safe high yielding status could be at risk.  Losing global investor appeal during the AOFM’s bloated bond issuance program ($A100b for 2-3 years) could see the share of offshore bond ownership shrink towards (say) 30%, placing heavy medium term downside on the Australian dollar.”

“While the RBA is of the view that a lower Australian dollar would be beneficial for the economy, the Bank is highly unlikely to want to repeat a 2008-style sharp correction in the exchange rate due to unexpected capital outflows.”

“Higher ACGB yields via expectations of a tightening cycle (globally and domestically) could entice global investors to step back into the ACGB market.  In contrast, rising ACGB yields via capital outflows and losing AAA via deteriorating fiscal fundamentals could keep investors on the sidelines.”