Aussie-Driven Inflation Spurring Worst Bonds: Australia Credit

Australia’s central bank is signaling its success in weakening the currency will spur inflation, adding to pressure on the developed world’s worst-performing bonds.

A surge in yields since Feb. 4 pared returns for the past six months to 1.2 percent, an index of debt due in more than a year shows, the smallest gain of 22 advanced-economy markets tracked by the European Federation of Financial Analysts Societies and Bloomberg. Inflation may reach a two-year high 3.25 percent, the Reserve Bank of Australia said this month. Assistant Governor Christopher Kent said Feb. 14 accelerating economic growth may drive costs higher.

The real yield on Australian bonds after accounting for consumer-price gains will be less than investors earn from Treasuries if the RBA is correct. Policy makers raised their forecast after the currency weakened 14 percent in 2013 and housing costs rose to a record, boosting the odds RBA Governor Glenn Stevens’ next move will be a rate increase.

The RBA dropped its easing bias at the Feb. 4 policy meeting and said inflation last quarter was stronger than expected, possibly because the impact of a lower exchange rate was being passed on more rapidly than anticipated.

(Source: Bloomberg)