International investors boosted holdings of Australian bonds to a record, seeking a haven from Europe's sovereign debt crisis in the world's best-performing fixed-income market.
Foreign buyers increased to 80 per cent from 75 per cent their share of outstanding government securities in the three months ended September 30, according to data from the Reserve Bank of Australia and the statistics bureau. Non-resident holdings of sovereign debt were 59 per cent in December for New Zealand, which trailed Australia with the next best returns.
The RBA's benchmark rate of 4.25 per cent is the highest among major developed nations even after back-to-back cuts aimed at shielding the economy from Europe's crisis. Australia's bonds have returned 6.2 per cent in US dollar terms over the past three months, the most among 26 markets tracked by Bloomberg/EFFAS indexes, followed by 5.8 per cent for New Zealand.
"We are still happy to add to holdings of Australian government bonds, including currency positions, as there is some room for appreciation," said Kei Katayama, a senior fund manager in Daiwa SB Investments's foreign fixed-income group in Tokyo.
"The US has uncertainty in the housing market and the Europeans may take time to find a solution to their problems. Australia is in better shape, both fiscally and economically." An almost 10 per cent drop in the local dollar, the biggest quarterly decline since 2008, made it cheaper for overseas investors to increase their holdings of Australian debt by A$23.9 billion (Dh91 billion) in the third quarter of 2011, the data show. That compared with A$19.2 billion of bonds sold by the Australian Office of Financial Management to raise funds and replace maturing debt during the period.
The so-called Aussie, the world's fifth most-traded currency, fetched $1.0465 as of 12.39pm in Sydney yesterday after reaching $1.1081 on July 27, the strongest since it was freely floated in 1983. The currency has traded at 79.16 US cents on average over the past decade, Bloomberg data show.
Gross borrowings by the Australian government were 20.5 per cent of the economy in 2010, the second-smallest burden among advanced nations after Estonia's 6.6 per cent, according to International Monetary Fund data from a September report. US obligations were 94.4 per cent of gross domestic product and Germany's were 84 per cent, the IMF data show.
Outstanding debt will peak at about A$220 billion around the middle of 2012 if the government meets its pledge to return to a budget surplus by 2013, JPMorgan Chase & Co estimated in a January 9 report.