Company spreads widen at half the global pace: Australia credit

Relative yields on Australian corporate bonds are rising at half the pace of their global counterparts on prospects the nation’s ties to China will help it weather a global slowdown stemming from Europe’s debt crisis.

The premium investors demand to own Australian dollar - denominated company notes widened 52 basis points to 229 basis points since June 30, the most since the first quarter of 2009, Bank of America Merrill Lynch data show. Spreads on U.S. debt expanded 91 to 255, and the gap for global company bonds grew by 99 to 262.

Investors are demanding extra compensation to hold all but the safest government bonds as the global economy slows and European policy makers struggle to contain the region’s sovereign-debt crisis. Australia is in better shape than other developed nations, Treasurer Wayne Swan said Sept. 25, with an economy set to grow faster than Europe and the U.S. through 2013 as China’s demand for iron ore and coal spurs the biggest mining boom in more than a century.

“Australian corporates operate in a strong economy which has avoided recession for over 20 years,” Vivek Prabhu, a Sydney-based asset manager who helps oversee A$4.6 billion ($4.4 billion) at Perpetual Ltd, said. “Australia’s close geographic and economic ties with emerging economies in Asia such as China, Korea and India have helped insulate our economy from some of the headwinds.”

Avoid Markets

Commonwealth Bank of Australia Chief Executive Office Ralph Norris said yesterday the nation’s biggest lender won’t have to raise more wholesale funds in 2011 and is able to stay out of the market for several months if the turmoil persists.

While credit-default swaps on Commonwealth Bank surged 90.4 basis points this quarter to 219.7 on Sept. 23, they were the cheapest relative to an index of global peers in at least two years on Sept. 14, CMA and Bloomberg data show.

The spread between the interest Australian banks pay when borrowing from each other for three months and swaps tracking expectations for the Reserve Bank of Australia’s benchmark rose 1 basis point yesterday to 39 basis points. The gap, a gauge of banks’ difficulty in accessing funds, closed at 61 on Aug. 8, the highest since January 2009.

Australian banks have no investments in Greece, compared with $56.7 billion owed to French banks, according to data as of the end of 2010 from the Bank for International Settlements.

Telestra Yields

Telstra Corp., Australia’s biggest phone company, added A$150 million to an existing issue of 7.75 percent bonds due in July 2020 on May 19, pricing the notes to yield 160 basis points more than the swap rate, according to an e-mailed statement at the time. The spread widened to 173 yesterday, Australia & New Zealand Banking Group Ltd. prices show.

The yield premium on Deutsche Telekom AG’s 500 million euro of 4.25 percent securities due in March 2020 surged 78 to 146 in the same period, BNP Paribas SA prices show.

Australia’s economy will expand 1.84 percent in 2011 before accelerating 4.25 percent in 2012, the fastest pace since 2007, according to strategists’ estimates compiled by Bloomberg. Gross domestic product in China, Australia’s biggest trading partner, will surge 9.3 percent and 8.7 percent, separate surveys show.

Citigroup Inc. and UBS AG have cut forecasts for global growth as the sovereign crisis that began in Greece spreads to larger European economies and threatens the region’s common currency, pushing the MSCI All-Country World Index of stocks in 45 nations into a bear market for the first time in more than two years.

Merkel’s Firewall

German Chancellor Angela Merkel said Sept. 25 that euro- region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area.

There will be little to no economic growth in industrial nations during the coming 12 months as Europe’s economy shrinks by 1 percent to 2 percent and the U.S. stagnates, according to Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co.

Australian business profits advanced last quarter by more than double economists’ forecasts as mining and utility companies benefited from stronger prices.

“Australian corporate issuers are well positioned to ride out further global uncertainty,” Moody’s Investors Service wrote in a Sept. 19 report. The government’s strong financial position “increases the attractiveness of corporate Australian borrowers for investors keen to diversify holdings into a growing economy without assuming additional sovereign risk.”

Refinancing Risk

All of the Australian corporate debt maturing in the next two years that Moody’s rates is investment-grade, which reduces refinancing risk, according to company.

The Markit iTraxx Australia index of credit-default swaps rose 40 basis points last week to 213, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The gauge was at 219 as of 4:41 p.m. in Sydney yesterday, according to Credit Agricole CIB.

Australian sovereign notes have generated an 11.1 percent return in the past 12 months, the biggest of any major market, Bloomberg/EFFAS Bond Indexes show.

Government bond yields are dropping for a ninth month, the longest stretch since at least 1978, with the 10-year rate falling below 4 percent on Sept. 23 for the first time since January 2009. It was at 4.01 percent yesterday.

Inflation Expectations

The gap between yields on Australian government bonds and inflation-indexed notes shows investors estimate consumer-price gains to average 2.43 percent for the next five years, down from 2011’s peak of 3.14 percent on May 6.

The nation’s dollar is poised to fall for a second month, its first back-to-back decline in more than a year, as turmoil spurs haven currencies such as the yen and the Swiss franc. It bought 96.33 U.S. cents at 4:38 p.m. in Sydney yesterday, after reaching a post-float high of $1.1081 on July 27.

The so-called Aussie, the world’s fifth-most traded currency, has surged 37 percent versus the U.S. dollar since the end of 2008, beating all of more than 150 peers tracked by Bloomberg, as investors sought to benefit from Australia’s links with China, the fastest-growing major economy.

Australia’s exports to China totaled A$5.6 billion in July after rising to a record A$6.1 billion the month prior, according to data from the statistics bureau.

Business investment in the nation rose more than economists forecast in the three months through June, the fourth straight quarterly increase, led by a surge in mining projects that is projected to accelerate.

Mining investment in the 12 months ending June 30 next year is projected to be A$82.1 billion, 45 percent higher than in the 2010-2011 fiscal year, the Sept. 1 report from the statistics bureau showed.

“Australian issuers are more immune to the effects of Europe, although not completely immune to the sentiment,” said John Sorrell, head of credit at Tyndall Investment Management Australia Ltd. in Sydney, which manages about A$14 billion of fixed-income assets. “When things settle down, the issuers will be favored because they will have been less tainted by the events due to relatively healthy balance sheets and the lower level of exposure to Europe.”