Investors confident on Australia debt after ratings scare, says top govt official

Moody's this week affirmed Australia's Aaa rating with a stable outlook.
Moody's this week affirmed Australia's Aaa rating with a stable outlook. PHOTO: BLOOMBERG

SYDNEY (REUTERS) - Investors have concerns about a possible decline in Australia's coveted triple-A credit ratings, but remain confident of the country's debt quality, a top Australian government official said.

Moody's this week affirmed Australia's Aaa rating with a stable outlook, in contrast to S&P which recently warned of a downgrade within two years due to a deteriorating budget deficit.

"Everyone is monitoring our ratings," said Robert Nicholl, chief executive officer of the Australian Office of Financial Management (AOFM), the government funding agency, who just ended an annual investor update in Asia.

"Their open question is 'it is the start of a trend in the underlying deterioration of the government's fiscal position or is it a one-time off?'", he said on Friday (Aug 19) after meeting bond holders in Hong Kong, Singapore and Northern Asia.

Australia is one of only a dozen countries rated triple-A by S&P and Moody's with A$430 billion of bonds on issue, up from around A$50 billion before the global financial crisis of 2007-08.

Two-year debt paying around 1.4 per cent is relatively high yielding compared with near-zero returns in most of the rich world and even negative rates of Germany and Japan, explaining why Australian debt is highly sought after and tightly held.

With around 60 per cent of Australia's national debt in the hands of international investors, Mr Nicholl said Asia was the largest regional holder and included central banks as well as fund managers. He noted growing interest from large hedge funds.

The ratio of foreign buyers, however, is a lot lower than in 2012 when it peaked at 80 per cent.

The funding agency CEO said the drop was the result of a decline in the number of central banks and reserve managers allocating money to the Australian dollar.

The debt agency estimates that three quarters of the world's 30 largest foreign currency reserve managers hold Australian government bonds.

Even though international bond holding has slipped, the AOFM noted new investors buying the country's debt, just not at the same rate as before.

Mr Nicholl cited particular interest from Japanese life insurance and pension funds keen on long-term debt.

In fact, Australia is actively considering lengthening its yield curve with a new 30-year bond to be issued by June next year. The longest-dated nominal bond so far matures in 2039.

It was also planning a 2041 bond to support the 20-year futures contract.

In terms of opening a new market, Mr Nicholl ruled out issuance in foreign currency as it would require approval from Parliament.

"We are restricted by law," he said.