Central banks are taking over as leading buyers of Australia’s bonds after Japanese investors sold the securities at the fastest pace in at least eight years.

Investors from the Asian nation with the region’s lowest benchmark yields capped three months of selling in January, when they offloaded a net 439.3 billion yen ($4.5 billion) in Australian dollar debt, the most since 2005, the Tokyo-based Ministry of Finance said Friday.

Offshore investors bought $13.1 billion of Australian fixed-income securities, the world’s highest-yielding AAA debt, in the fourth quarter including $4.5 billion of sovereign paper, government data released in Sydney last week showed. The Bundesbank said last week the securities will play a role in its reserves.

‘‘What you’re seeing is sovereign buying in the Aussie market filling the gap left by Japanese investors and our belief is that a lot of that is coming from the European central banks,’’ said Damien McColough, head of fixed-income research at Westpac. ‘‘Sovereigns are still buying government bonds but they’re also buying supra-national and state debt at a faster pace than they were previously.’’

Central banks managing as much as $US7 trillion, including those in Germany, France and China, are holding Australian dollars, according to data compiled by Bloomberg and documents released by the Reserve Bank.

At the same time, prospects for Japan’s return to growth buoyed sentiment among investors there, driving them away from top-rated Australian debt into riskier assets such as equities.

Bundesbank buying

‘‘As a central bank, the Bundesbank manages foreign-currency reserves primarily with safety and liquidity in mind,’’ Germany’s central bank said Friday in a statement. ‘‘The Bundesbank has a very long-term investment strategy. The Australian dollar will in future complement the US dollar and Japanese yen, which have already long been used as reserve currencies.’’

Reserve managers poured funds into Australia as slow growth and mounting debt in the biggest developed markets including the US, UK and Japan spurred a hunt for alternative havens.

Australia, with $267 billion in securities outstanding, is one of only 10 nations that hold AAA scores from all three main credit rating companies. Its bond market is the largest among top-graded sovereigns after Germany, Canada and the Netherlands.

‘‘The little Aussie bond market is the fourth-biggest AAA in the world, and the size and risk characteristics of the market, the liquidity of the currency and exposure to China all remain in place,’’ said McColough. ‘‘There is a sense that the worst of the Japanese selling is over and there’s the potential for them to get back in.’’

The Aussie was at 98.29 yen today, after reaching 99 yen on March 8, the highest level since August 2008.

Investors may consider re-entering the market if the Aussie were to decline to between 85-90 yen, said McColough.

‘‘Japanese investors started taking profit as the yen weakened,’’ said Yoshisada Ishide, who manages the $US10.2 billion Daiwa SB Short-Term Australian Dollar Bond Open Fund. ‘‘Investors concentrated their holdings in the Australian fixed income market for safety when market sentiment was negative. Now, people are starting to diversify their assets and going into other markets such equities.’’

Ishide said he prefers to hold debt by corporate issuers, state governments and foreign borrowers over sovereign notes to ‘‘enhance’’ his fund’s performance.

Higher rates

Australia’s 10-year bonds yield at least 167 basis points more than rates in the three larger AAA markets. The securities offered a 6 per cent return when adjusted for price swings over the three years ended December 31, the most among nine top-rated markets covered by indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries offered a risk-adjusted gain of 4.1 per cent.

Australian bond yields have climbed after the Reserve Bank of Australia left interest rates unchanged at 3 per cent last week and signalled previous cuts are starting to have an impact.

The benchmark 10-year bond yield was at 3.60 percent today, its highest since May, after rising 21 basis points, or 0.21 percentage point, last week.

Better prospects for growth have spurred investors to purchase higher-yielding Aussie debt including the bonds of states, government-backed lenders and corporates. The extra return investors demand to hold securities issued by Australian provinces and highly-rated foreign-based borrowers like Kreditanstalt fuer Wiederaufbau, Germany’s state-owned development bank, was at 64 basis points on February 25, the least since August 2011.

The premium investors demand to hold corporate bonds declined to 144 on February 18, the lowest since December 2007.

‘‘Japan is just in an unusual situation at the moment with the market anticipating bold steps from the BOJ,’’ said Kieran Davies, chief economist at Barclays in Sydney. Investors there have become ‘‘far more adept at trading in and out of the Australian bond market, depending on what the yen cross rate is doing.’’

Bond inflows have supported the Aussie, the world’s fifth most-traded currency, which climbed 20 per cent against Japan’s yen over the past six months.

Japanese investors held 13.98 trillion yen of debt denominated in Australian dollars as of the end of 2011, based on the latest figures available from the Bank of Japan.

At the time, the figure was equivalent to $178.1 billion compared with Australia’s sovereign bond market of $210.3 billion, according to data compiled by Bloomberg.


The original release of this article first appeared on the website of Hangzhou Night Net.