Asia Times: Aussie bonds rise on hopes of credit rating upgrade



	July 02, 1999	atimes.com

Oceania

Aussie bonds rise on hopes of credit rating upgrade

SYDNEY - Australian bonds rose for athird day after Deutsche Bank Ltd. said in a research reportreleased in Sydney late Tuesday that Australia's credit ratingcould be upgraded after the May 11 budget.

The government is expected to deliver its third consecutivebudget surplus amid buoyant economic growth and slow inflation.Australia's foreign currency debt is rated ''AA'' by Standard &Poor's, its third highest rating. S&P placed Australia on apositive outlook in 1996, signaling it may upgrade the rating.

''It's clear the government has delivered on its fiscalconsolidation plan'' that was a pre-condition set by Standard &Poor's for a possible rating upgrade, said Ivan Colhoun, senioreconomist at Deutsche Bank in Sydney. ''Asia has not proved thedisaster problem for Australia that people feared."

The benchmark September 2009 bond rose A$4.50 per A$1,000bond, pushing the yield down 5 basis points to 5.29 percent. TheMarch 2002 bond yield fell 5 basis points to 4.82 percent.

S&P last changed Australia's rating in 1992, cutting it anotch when the economy was just emerging from recession. In 1996,the international ratings company said tighter governmentspending policies may warrant a higher rating, although it hasn'tbegun a formal review of the rating yet.

''Had it not been for the economic turmoil in Asia, wesuspect a rating upgrade would have featured sooner,'' DeutscheBank's global market credit research group said. Any ratingupgrade would help trim the premium of Australian bond yieldsover U.S. Treasuries.

The premium at which the Australian 10-year bond is tradingto the U.S. bond of comparable maturity narrowed to 15 basispoints from 18 basis points Monday. The premium indicates theextra risk investors see in holding Australian government bondsrather than U.S. bonds.

Australian bond yields may fall below those of U.S.Treasuries ''if the economy slows,'' said Michael Swan, who helpsmanage A$1 billion (U.S.$649 million) in fixed-income and cash atIOOF Asset Management.

The economy grew 4.9 percent last year, its fastest pace infour years. Consumer prices only rose 1.6 percent in 1998, belowthe central bank's 2 percent to 3 percent target band.

Talk of a credit rating upgrade has been helped byAustralia's improved creditworthiness. As global interest ratesfell over this decade, Australia's debt services bill - theratio of interest payments to exports - more than halved to 9.6percent in the fourth quarter in 1998 from 20 percent in 1990.

The conservative coalition turned a A$10 billion budgetdeficit it inherited into a surplus within two years of gainingpower in 1996 by cutting government spending, such as oneducation. The surplus budget in the 12 months ended June 30,1998, was the first in eight years.

Moody's Investor Services rates Australia ''Aa2", its thirdhighest rating, having cut the rating in 1989. Neither Moody's norS&P would comment on Australia's credit rating outlook.

The implied yield on June 90-day bank bill futures, a keybarometer of interest rate expectations, fell 1 basis point to4.71 percent, just below the central bank's benchmark rate of4.75 percent. That indicates investors expect rates to be left onhold until at least mid-year.

The implied yield on the June three-year bond contract fell4 basis points to 4.85 percent. The implied yield on the June 10-year bond contract fell 6 basis points to 5.29 percent.

(Bloomberg)