Global bond giant PIMCO has invested several hundred million dollars in AA and A-rated debt in Australian banks, amid expectations that the Reserve Bank will raise interest rates this month to contain inflation.
Bill Gross, PIMCO managing director, said the US$746 billion manager bought the securities at 150 to 200 basis points above the London Interbank Offered Rate (LIBOR). PIMCO had moved into the front-end of the market, targeting the one-year forward rate. He told an audience of domestic investors and journalists, via satellite, last month that Australia was one of the most attractive bond markets in the world while the US was one of the least.
Gross said that spreads on these assets were “too good to miss,” given the underlying strength of the Australian economy. “Australia is one of the most attractive bond markets in the world. It’s more attractive than the US in terms of government and treasury quality.” Gross said the strength of the Australian economy was due to its strong commodity exports, 30-year record low unemployment rate and headline inflation of 3.5 per cent.
He said Australia was tied to the growth rates of emerging economies that have supported rewarding commodity prices. “Now as the emerging and developing countries exert their strength, Australia commands the high ground and the US occupies the low ground.” He predicted that the US Government would intervene in that country’s economy in an attempt to halt the falling prices of financial assets, and that the Federal Reserve would continue to cut the federal funds rate.
“This financial asset-based economy, which is dependent on rising prices, has experienced two years where these prices are declining. “It’s paramount that asset prices go up.” He said that the Federal Reserve’s cuts in interest rates had not yet achieved this, and that the US government might “put a floor” under house prices “to stop the deterioration of asset prices in this economy”.
This could enable consumers “to borrow money through the home”. “Obviously the US is more than a paper–producing economy,” he continued, “But the heart of the US miracle has been to expand consumption from 65 to 70 per cent of GDP. Financial assets have been at the heart of it.”
Gross also warned of threats inherent in the decoupling story, despite the likelihood that China will continue to grow at a double-digit rate. “China has problems of its own, such as restricted credit and monetary systems.”