Why Australian government debt remains attractive as commodities slide

The widespread sell-off in commodities such as metals and oil will continue to support the long-term story in Australian government bonds, Kames Capital’s Colin Finlayson has said.
 
Finlayson, co-manager of the Kames Absolute Return Bond fund, said Australian government bonds remain one of the more attractive assets longer-term as tumbling commodity prices and a weakening economy may result in the country’s central bank taking action to stimulate GDP growth.
 
“It is quite likely that we have seen a low point for yields for Australian 10-year government bonds, after they fell to 2.25% earlier this year, and we have locked-in profits recently,” he said. “But investors should not write off the debt by any means.”
 
Finlayson said the Australian dollar’s strength may require the central bank to ease monetary policy further to counter the commodities downturn. Such a move would also make government bond yields look more attractive.
 
“With the Australian dollar trading above where it should be given economic fundamentals, any rate cuts to force the currency lower could provide additional support to Oz bonds on a relative – if not absolute – basis,” he said.
 
While yields on Australian government debt have already moved off lows, Finlayson expects there will be specific opportunities to re-enter the trade relative to other government bonds.
 
“We recently moved from bullish to neutral on Australian government bonds relative to US treasuries, as they look a little rich,” he said.
 
“But if yields unwind any further we may well re-enter the trade, as we expect support for Australian government bonds is likely to prove greater in the months ahead than for US treasuries.”