Aussie govt high yields to limit bond indigestion

24 Feb 2009 Reuters

By Cecile Lefort

SYDNEY, Feb 24 (Reuters) - Australia's state-backed debt could triple in the next three years as governments and banks go on a borrowing binge, but the country has significant advantages over major sovereign issuers such as the United States to offset the risk of debt indigestion.

As many governments around the world are piling up huge amounts of debt to fund efforts to counter the global downturn, analysts expect the same of Australia.They estimate outstanding debt will be as high as A$500 billion ($322 billion) by 2012, triple current levels. That would equal half the country's annual economic output, a lot for investors to swallow when governments globally are competing for their cash.

"There probably will be some issues with digestion," said Sally Auld, a strategist at JPMorgan in Sydney. But she highlighted mitigating factors such as increasing investor demand for debt that carries a sovereign label. "Triple A rated supply is going to go up but also demand for that sort of paper will go up as lots of funds who liked credit now switch back to more vanilla products," she said. But that could apply to other countries as well. As elsewhere, Australia has launched a substantial stimulus package of A$42 billion to fight a looming recession.

But unlike many other sovereign issuers, Australia is starting from a position of strength thanks to years of budget surpluses and a strong banking sector that avoided investing in the U.S. subprime mortgages that triggered the global financial crisis. Australia's high bond returns and a weakening currency are also major pluses. "In a relative sense, yields in Australia are still quite high, they will help attract offshore investors," said Auld. Australia's 10-year bonds yield 4.11 percent, much higher than similar bonds in countries with the same AAA rating. U.S. 10-year bonds, for example, yield 2.78 percent and British 10-year bonds yield 3.46 percent.

Last week, the governor of the Reserve Bank of Australia said policy rates could still fall, but they were unlikely to fall as much as in the United States or Britain, suggesting yields will maintain a premium over debt in those countries.

For federal or regional governments, now is also the right time to borrow because bond yields are at 50-year lows. Moreover, Australian bonds may seem cheap to many punters. The Australian dollar has fallen over a third since July against the U.S. dollar, and is expected to fall further.

NO DEBT
Another key advantage for Australia's ambitious borrowing plan is it is starting almost from scratch with near zero debt outstanding, so its bonds have a scarcity value. In fact, Australia's is starting from a rare net asset position of 4 percent of GDP, based on the end of the financial year 2007/08 on June 30.

Even with net debt expected to reach 5 percent of GDP by 2011/12, it will still be well below net debt of about 20 percent of GDP in Canada, about 40 percent in Europe, Britain and the United States and about 80 percent in Japan, UBS says.

By keeping its debt outstanding steady at around A$50 billion for the past five years, the central government made its debt scarce when compared with other AAA-rated nations. Its debt level is a fraction of the US$10 trillion in outstanding debt of the United States or the 128 billion pounds ($185.8 billion) in Britain. "At least in the initial phase, new CGS (Commonwealth Government Securities) issuance is likely to be in demand," said Westpac Banking Group's chief interest rate strategist, Damien McColough.

Australia's recent bond auctions received good demand with bid-to-cover ratios above four times. This is almost double the level of demand seen in U.S. Treasury auctions, although they tend to offer much greater amounts of debt than in Australia. This week alone, the U.S. will borrow $94 billion - three times the total in Australian government bonds outstanding.

FEDERAL VERSUS STATES
But the government is not the only borrower. The country's state governments are looking to suck up almost as much money, if not more, to fund their own infrastructure plans. And the central government has inadvertently put the states at a disadvantage by guaranteeing wholesale borrowing by the country's banks, effectively lending them its AAA rating. The guarantee has been vital for banks to secure funds. They have raised A$58 billion already this year.

But it has also introduced a new competitor for the states and one that pays lenders a more attractive return -- as much as 100 basis points (bps) more than semi-government bonds. And after Standard & Poor's cut the rating on Friday of Queensland Treasury Corp, the largest state authority borrower in Australia, the gap will only increase further. "If there is going to be an (indigestion) tipping point, it's going to occur in the states before it occurs in the government. There will be less investors for state-debt in the near term than with the federal government," said Westpac's McColough.

Commonwealth Bank of Australia's head of debt research, Adam Donaldson, predicts the total amount of AAA-rated bonds, sold by the Treasury, the six local semi-governments and banks that now benefit from a sovereign guarantee, will balloon to nearly A$500 billion by 2012, triple the level of June 2008. "One can't help but fret the market is going to have difficulty absorbing that issuance," Donaldson said.

I can sense a long AUD trade looming at some stage!! KT

NZD/USD

Stop filled on Friday, so back to long NZD against the USD. Still not comfortable with this really, but if we see a move over 0.5300 will sell it again. Overall more comfortable being short than long, but need to get the right entry levels. Still think it is more of a 0.4500 to 0.5500 range now than 0.5000 to 0.6000.

There is plenty of bad news brewing for the NZD/USD. Still happy being long NZD/JPY however, and will top this up some more on dips now that the USD/JPY looks more perky.

Overall still happy with all my positions. Will update these later in the week.
Need to get Miss January posted before I run out of February!

NZD/USD Update

Have placed a stop on 4m NZD/USD position at entry level of 0.5150.
This will return me to original position of NZD2m long at 0.5668.

Basically have concluded that there is so much bad news priced into the NZD/USD, not sure whether it can move much lower. But it can't rally much either in these markets so may yet go back to short at higher levels if seen.

Also like the way the Yen is weakening and a weaker Yen will help the AUD and the NZD higher.

We'll see.

Japanese Yen

Continues to weaken, and the USD/JPY is looking perky and retesting the highs seen earlier this year.
Early days yet, but maybe the recovery in this rate is finally beginning.

This is good news, since I am long......but at much higher rates!!

So it begins - Recession fans economic nationalism in the UK

GRIMSBY, England, Feb 18 (Reuters) - At the Job Centre in Grimsby, a hard-knock town on Britain's east coast, security guards man the doors.

Inside the government-run office, dozens of men and women, many in their teens or early 20s, crowd the waiting area, hunched over computers scanning the job listings.

Outside, others gather to smoke, drawing hard on their cigarettes before coming in to search for the latest opportunities, then drawing even harder on their way out when they have discovered once again that there is nothing going.

All the while, security staff watch for trouble.

"There's always a few problems in here," says Danny Brewitt, a 19-year-old who has been looking for construction work for weeks without success, thwarted by an economy that has dragged Grimsby and the rest of the country deep into recession.

Asked to put his finger on why there seems to be so little work available, Brewitt does not hesitate in replying.

"It's the foreigners," he says. "The Poles and other immigrants who come here will work for less."

He is quick to explain that he has no problem with Polish people, or immigrants in general, it is just the fact they will accept the minimum wage (about $8 an hour) for most work, whereas skilled or semi-skilled British workers expect more.

"They're undercutting the market," says Brewitt frankly.

Whether or not that is true -- and there is plenty of evidence that hundreds of thousands of migrant workers from new European Union states who have come to Britain in the past four years have added much more to the economy than they have taken away -- it highlights a worrying aspect of the downturn in Britain: an accelerating drift towards economic nationalism.

"BRITISH JOBS FOR BRITISH WORKERS"

Since the global financial crisis began in late 2007, British Prime Minister Gordon Brown, a former finance minister with a long economic track record, has cast himself as the man to lead Britain -- and even the world -- in uncertain times.

In that role he has wasted no opportunity to urge other states not to resort to protectionism to defend their economies, and will host a meeting of the 20 largest economies in London in April when that message is likely to be strongly reiterated.

It is comments he made before the crisis began, after taking office in June 2007, that have undermined his anti-protectionist credo and given British workers, traditional supporters of Brown's Labour Party, a reason to feel aggrieved.

Speaking to Labour supporters in September 2007, Brown promised "British jobs for British workers", a pledge that even at the time made the jaws of some Labour faithful drop.

Now the phrase is a rallying cry for British workers, who have held a series of protests at power plants countrywide in recent weeks, demonstrating against the employment of foreign contractors to work on critical energy sites.

Some of the most drawn-out demonstrations have been at the Total-owned Lindsey oil refinery near Grimsby, where British workers have criticised the employment of imported Italian and Portuguese labourers on the construction of a new plant.

"We've fought tooth and nail to get a decent deal for ourselves and now others are being brought in to do the work," said Paul McDowall, a disgruntled British worker, earlier this month, calling on Brown to respect his British jobs pledge.

"It's got nothing to do with racism. You have to protect our workers and their rights, otherwise what are you going to do?"

Under EU and British law, companies such as Total have the right to bring in foreign contractors to work in Britain.

The free movement of labour is a central tenet of the 27-member union. Under the rules, more Britons are working abroad than citizens of other EU members working in Britain.

As the economic downturn deepens, with Britain's gross domestic product forecast to contract by as much as 2.8 percent this year and unemployment edging above 6 percent, Brown and other Labour leaders are aware it will be a struggle to placate British workers while avoiding protectionism.

POLITICAL FALLOUT

There are already signs of political fallout, with the demonstrations at the Lindsey refinery spreading to half a dozen other power stations and nuclear plants nationwide.

The far-right British National Party (BNP), which is opposed to EU membership and wants limits on immigration, has seen its popularity surge in the East Midlands and areas near Grimsby, according to the party's regional coordinator Geoff Dickens.

In a local council election in the town of Boston, the BNP won the seat, defeating Labour, Conservative and Liberal Democrat opponents.

"We're seeing a steady increase in support across the whole area and have been for about a year," said Dickens. "It's a region where there's a certain amount of discontent and where earnings have traditionally never been that high."

On its website, the BNP has a banner at the top reading: "British Jobs for British Workers. When we say it, we mean it!"

In Grimsby, a grey and weather-beaten town of about 90,000 people where the unemployment rate in some areas is 20 percent, the darkening outlook is steadily taking its toll.

Grimsby was once one of the largest fishing ports in Britain, with a vast fish-packing and frozen-food industry, but its docks are run down and fish merchants are moving out.

Kevin Stansfield is a second-generation fish merchant who has invested heavily to try to stay in business. His son has followed him into the game even though Stansfield advised him against it. There was no other work to pursue.

Asked what he believes to be the biggest problem for jobs and industry in Grimsby, he and a colleague are quick to reply.

"It's the foreign workers," they say, almost in unison. "They'll work for next to nothing and that undercuts the market. Local labour just can't compete."

By Luke Baker.

Sadly, this will become a global trend - KT

Trade protectionism

BEIJING, Feb 15 (Reuters) - China's official Xinhua news agency slammed the "Buy American" requirement of the U.S. economic stimulus package, saying in a commentary that trade protectionism is a "poison" that will harm poor countries.

The remarks are the first indication of the reaction in Beijing to the U.S. measure, which has been criticised by U.S. business groups that fear it could invite other countries to keep American goods out of their own stimulus programmes.

"History and economic theory show that in facing a financial crisis, trade protectionism is not a way out, but rather could become just the poison that worsens global economic hardships," Xinhua said in the overnight commentary, issued in response to the passing of the U.S. plan.

The U.S. Congress approved the $787 billion plan to jump-start the world's biggest economy on Friday, stipulating that public works and building projects funded by the stimulus use only U.S.-made goods, including iron and steel.

The plan does require that procurement be carried out in a manner consistent with U.S. obligations under multilateral and bilateral trade pacts -- potentially giving Canada, the European Union, Japan and some other countries the chance to benefit from the additional spending.

But countries such as China, India, Brazil and Russia, which are not members of an international government procurement agreement, would be shut out.

Xinhua cited the example of the Great Depression of the 1930s as showing that moves to protect domestic markets, and ensuing trade wars, could have only negative effects on the global economy.

"Trade protectionism will also cause catastrophic effects to some poor countries, making the current financial crisis one of a humanitarian crisis as well," it said.

This is all so true, and very sad to see the "land of the free" going this way - KT

Japanese Yen

The Yen is looking weaker, both against the USD and the NZD

...Will it last the week?

NZD Update, maybe a "freeze" trade looming?

After much debate with myself, I have left both the long position (NZD2m @0.5668) and the short position (NZD4m @0.5150) in place, still net short NZD2m.

Given the back pedaling from the ratings agencies this week, all is not as it seems. I suspect the government has been active behind the scenes, looking to stop a possible downgrade. It was the threat of a downgrade that caused the NZD/USD to drop from 0.6000 to 0.5300 in the first place. Then cutting interest rates by 1.5% pushed the NZD even lower to 0.5000.

If the NZD/USD develops a range between 0.5000 and 0.6000 in the weeks ahead there may be opportunities both sides of the trade.

So I may buy back NZD2m in the low 0.5000 area and move to net square then trade both sides from there.

Not sure yet, but leaving both trades open gives me some options........