* Offshore investors own 83.5 pct of Aussie federal bonds
* With govt debt supply thin, state debt becomes attractive
* State debt offers extra 115-150 bps yield; highly rated
By Cecile Lefort
SYDNEY, Aug 6 As yield-hungry investors from
Colombia to Kazakhstan lap up Australia's rare and safe
government bonds, it seems only a matter of time before they
acquire a taste for the country's A$200 billion ($211.1 billion)
highly-rated regional debt markets and help ease state borrowing
Desperate to diversify their currency reserves, central
banks and sovereign funds from far afield have been piling into
Australian commonwealth government bonds, one of the few liquid
triple-A sovereign debts left.
"You name a country and they have it," said a fixed income
banker who asked not to be named because he's not authorised to
speak to the media.
Offshore holdings of the A$238 billion Australian sovereign
bonds on issue have ballooned to around 83.5 percent, up from 71
percent a year ago and around a third a decade ago, Barclays
research data show.
Colombia, Peru, Brazil, Kazakhstan, Bangladesh, Israel and
Russia are among the more unusual names cited by three
Asia-based bankers with direct knowledge.
With Australian 10-year bond yields hovering
around record lows near 3 percent, they still offer an
attractive alternative to those in most developing countries.
Germany and the Netherlands are even paying negative yields on
very short-term paper.
To the envy of most nations, Australia has little public
debt and, with the Labor government pledging to return to budget
surplus by 2013, Australian sovereign bonds will become even
Analysts expect government debt on issue to remain around
the current A$230 billion mark, which is less than half what the
U.S. Treasury sells every month.
With a shrinking pool of debt and a growing hunt for yield,
analysts anticipate foreign investors will migrate to other
types of top-rated Australian dollar assets previously
overlooked, such as bonds issued by state governments.
"It's only a matter of time before official reserve managers
have a look at them," said Stephen Miller, head of fixed income
at BlackRock Australia, a unit of BlackRock Inc, the
world's largest money manager.
China's central bank, the world's largest holder of
reserves, is reportedly exploring investing in such securities.
Also called semi-governments, the states of New South Wales,
Victoria and Western Australia are rated triple A and have a
total of around A$95 billion of bonds on issue, according to the
UBS Composite Benchmark.
So far, demand for their debt has lagged behind their
federal counterpart and these securities have been offering
premiums as high as 115 basis points over government bonds since
The gap is even wider for states rated AA-plus, such as
resource-rich Queensland, with dealers quoting 150 basis points
above Australian sovereign bonds.
Such a wide difference is one of the reasons BlackRock
Australia, which manages around A$42 billion in total assets,
has bumped up its allocation of state bonds.
And it may increase it again.
"It's one of the things we have been very focused on for
much of 2012," said Miller, seeing yields as extremely
One hurdle, though, is a perceived lack of liquidity in the
semi market as around half of all state debt is held by
Australian banks to satisfy Basel III liquidity reserve
requirements, which makes them very reluctant to sell.
"The semis market doesn't have the depth of U.S.
Treasuries," said Charlie Jamieson, co-head of fixed income at
Bank of America Merrill Lynch in Sydney, referring to the state
government bond market. "But it is a fully functioning market
and you can buy them at a price should you wish to invest."