Unbalanced recently went very long Sydney property, so it calmed jangled nerves last month to hear Australian residential mortgagebacked securities described as “bulletproof ” by Aberdeen Asset Management’s head of Australian fixed income, Victor Rodriguez.

For a healthy 130 bps spread, the scenario under which Aussie RMBS would start to register capital loss seemed highly unlikely, at least the way Rodriguez described it. “You’d need three things to happen concurrently before you lost your first dollar. House prices would have to fall 40 per cent in nominal terms. The rate of defaults in our portfolios would have to rise to 15 per cent. At the same time, a major Australian mortgage insurer would have to fail.” These mortgage insurers tend to be rated AA-, and the notes themselves AAA, so in the Standard & Poor’s version of the world, these investments would indeed be coated in Kevlar.

Not that the word of the ratings agencies has ever been taken as gospel truth at Aberdeen. An example of Aberdeen’s healthy scepticism can be found in Australia’s semi-government bond market. Portfolio manager Nick Bishop was talking about the yield pick-up available from Queensland government debt, ever since the State’s credit rating was lowered to AA in February because of the big Budget deficit incurred by its capital works program. “NSW has got the AAA rating, but the flipside is it’s not spending as much on the infrastructure it needs for growth. We’d even say there’s a case for the ratings of the two states to be the other way around.”

A statement that jangled our nerves anew – should we have gone very long Brisbane property instead?

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