Australian dollar holds gains, bonds unfazed by budget carnage

[SYDNEY] The Australian and New Zealand dollars paused on Thursday, having already notched up hefty gains for the week, while Australia's government confirmed just how much carnage the coronavirus had caused to its budget finances.

The Aussie was taking a breather at US$0.7137, having climbed 2 per cent so far this week to touch a 16-month peak at US$0.7184. The next major barriers are the April 2019 high at US$0.7206 and then the January top of US$0.7295.

The kiwi dollar stood at US$0.6664 after stretching as far as US$0.6689, ground not visited since January. Its major hurdle is a US$0.6755 high from December of last year.

As widely expected, the Australian government revealed its budget deficit had blown out from zero to almost A$86 billion (S$85 billion) in 2019/20, with another A$184.5 billion shortfall expected in the year to June 2021.

Gross debt was forecast to balloon by A$168 billion to A$851.9 billion by mid-2021, or 45 per cent of annual GDP.

That would still be low by developed world standards and would not on its own threaten Australia's triple A credit rating, said S&P Global Ratings.

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The agency did warn that it might cut the rating should the Covid-19 outbreak cause more economic damage than expected, and noted that the recent outbreak in the state of Victoria was a concern.

Markets took all the red ink in their stride given the government was having no trouble funding its debt amid strong demand for bonds at home and abroad.

Futures for 10-year bonds added 2 ticks to 99.1100, implying an yield of 0.89 per cent.

A regular tender for A$3 billion in Treasury notes on Thursday drew bids worth A$18.2 billion. A new 2051 bond line will be sold by syndication next week and is expected to be well received.

"Most of the interest for this new bond is likely to come from offshore investors," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities.

"The bulk of offshore investors are likely to be liability driven accounts that seek long duration assets to more closely match defined benefit pension commitments."

He expects anywhere between A$4-8 billion of the new 30-year bonds to be sold with the bulk of the interest to come from North American and UK fund managers.

REUTERS