Default Swaps Fall Most Since 2009 Beating Europe, U.S.: Australia Credit

Corporate bond risk in Australia is dropping at the fastest pace in two years, beating declines in Europe and the U.S. as investors bet a global financial crisis will be averted.

The Markit iTraxx Australia index of credit-default swaps fell 27 basis points last week to 189 basis points, the biggest weekly drop since July 2009, after rising to a more than two- year high on Oct. 4, CMA prices show. Contracts on European company debt declined 16 to 172, while the U.S. corporate bond risk benchmark dropped 9 to 130, the data show.

Yield premiums on Australian company debt narrowed for the first week in four, Bank of America Merrill Lynch data show, as Group of 20 finance ministers and central banks set an Oct. 23 deadline to deliver a plan to avoid a Greek default, bolster banks and curb contagion. Investors have reduced bets the Reserve Bank of Australia will cut borrowing costs after the nation’s jobless rate fell in September for the first time in six months and business and consumer confidence improved.

“The severity of the move wider in Australian credit- default swaps was overdone, and if there is a comprehensive package out of Europe you would expect people’s focus to shift further back to fundamentals,” said Mark Mitchell, head of credit at Sydney-based Kapstream Capital, which manages A$3.6 billion ($3.7 billion) of assets. “The recent Australian employment data was pretty strong and corporates have been in good shape for some time.”

European Union member states are set to agree on a “very serious plan” to help contain the region’s fiscal crisis and recapitalize lenders, Economic and Monetary Affairs Commissioner Olli Rehn said Oct. 15.

Germany damped expectations for a fast resolution to the crisis as Steffen Seibert, Chancellor Angela Merkel’s chief spokesman, said yesterday the search for a solution “surely extends well into next year.”

Fastest Growth

Australia’s economy will expand 4.3 percent next year as demand for iron ore and coal spurs the fastest growth among Group of 10 currency nations, according to economists surveyed by Bloomberg. The U.S. will expand 2 percent and growth among G-10 countries will average 1.8 percent, the surveys show.

The unemployment rate in Australia declined last month for the first time since March as employers added double the workers economists forecast, a report showed Oct. 13. The number of people employed rose by 20,400 and the jobless rate fell to 5.2 percent from 5.3 percent, the statistics bureau said.

Business confidence strengthened last month by the most since January, according to a National Australia Bank Ltd. survey of more than 400 companies released Oct. 11. A Westpac Banking Corp. report published the following day showed consumer confidence rose for a second month.

Cash Holdings

Average cash holdings at Australian companies have increased to almost A$1.6 billion from less than A$700 million in 2007, Moody’s Investors Service said in a Sept. 19 report. All of the A$23 billion in rated corporate debt maturing in the next two years is investment grade, it said.

‘‘The investment-grade ratings should provide such Australian issuers with access to deep pools of funding,” Moody’s said. “Australia remains an attractive sovereign risk amid heightened uncertainty in the global macro-environment.”

The extra yield investors demand to hold Australian corporate bonds instead of government debt shrank 2 basis points to 246 last week, Merrill Lynch data show. U.S. spreads narrowed 14 basis points to 251 in the same period, while global yield premiums decreased 16 to 256.

Bank Default Swaps

The average cost of credit-default swaps on Australia’s four biggest banks dropped 25 to 188, the biggest weekly decline since April 2009, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

The Markit iTraxx Australia index of contracts on 25 companies rose 7 basis points to 190 as of 9 a.m. in Sydney today, according to Australia & New Zealand Banking Group Ltd. Credit-default swaps on the nation’s sovereign debt declined 14 basis points last week to 76.5, the biggest weekly drop since May 2010, CMA prices show.

“If part of the European bailout package involves addition to global liquidity this is a clear upside risk to global inflation and to Australian inflation also,” said Paul Bloxham, chief economist for HSBC Holdings Plc in Sydney and a former central bank official. “We see the RBA as on hold this year but expect that the next move is still more likely to be up than down due to the upside risks to inflation.”

Inflation Expectations

The gap between yields on Australian government bonds and inflation-indexed notes shows investors estimate consumer prices will rise an average of 2.5 percent for the next five years, up from 2011’s low of 2.37 percent on Oct. 4. Last week’s 10 basis- point advance was the biggest since the five days to May 6.

Futures contracts show the cash rate will be at 4.32 percent by December, up from as low as 3.47 percent on Aug. 9. Three of 21 economists surveyed by Bloomberg News predict the RBA will lower rates to 4.5 percent at the next policy meeting on Nov. 1, with the rest expecting no change.

The benchmark 10-year government bond yield fell 10 basis points today to 4.48 percent at 9:56 a.m. That’s 233 basis points more than similar-maturity Treasuries.

Mining Boom

The central bank says Australia is undergoing a once-in-a- century mining boom to meet demand from India and China, the nation’s biggest trading partner. Exports surged to a record A$28.4 billion in August on coal shipments, and the A$3.1 billion trade surplus was the second-widest on record, the statistics bureau said Oct. 4.

Demand for commodity exports is driven by “urban construction or infrastructure spending in China and India,” Nomura Holdings Inc. analyst William Mak wrote in an Oct. 10 note to clients. “Even if Asia experiences softer growth in the near future, our economists believe that Asia’s demand for commodity exports from Australia -- mainly coal and iron ore -- should hold up relatively well.”

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net.

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