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Australia’s Top Pension Fund Sees New Bond Rally Helped by QE

Matthew Burgess
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Australia’s Top Pension Fund Sees New Bond Rally Helped by QE

(Bloomberg) -- Australia’s largest pension fund is positioning for another leg higher in sovereign bonds as the Reserve Bank of Australia gets closer to unleashing quantitative easing for the first time.

The central bank may begin buying the country’s debt as soon as next year, said Carl Astorri, head of asset allocation and research at AustralianSuper Pty. And policy makers will probably lower their benchmark rate -- now at 0.75% -- as close to zero as they think they can get without damaging the banking system, he said.

“That process would flatten the yield curve and push the currency down,” Astorri said about QE in an interview in Melbourne Wednesday. One reason why AustralianSuper has an overweight stance on government bonds and an underweight one on the Aussie is thanks to the “view that we may well have QE start to get priced in Australia,” he said.

Read how QE debate in Australia has traders watching for these signs

Astorri, who worked at the Bank of England early in his career before joining the financial-services industry, has helped give the A$175 billion ($120 billion) fund a tilt in favor of sovereign bonds.

Australian yields have tumbled to record lows this year as a sluggish economy and policy easing by global peers spurred RBA Governor Philip Lowe to cut rates three times. Bonds have given up some of those gains the past month, however, as traders dialed back on bets for more stimulus. Futures pricing indicates a 50-50 chance of a 2020 rate cut from the RBA.

Lowe has been pushing back against assumptions that unorthodox policy Down Under is inevitable, though the RBA did hold its first formal discussion on options in August.

Market participants have also been increasingly debating the issue. For now, the base case at banks including Goldman Sachs Group Inc. and Morgan Stanley is that fiscal stimulus will help give the economy a lift, lessening the chances for a QE program.

Astorri says that the current high level of foreign ownership of Australian government bonds -- at more than half the market -- means the Aussie would drop as central bank purchases effectively pushed some overseas funds to sell. He also expects rates to remain low for a protracted period.

Elsewhere, AustralianSuper is taking less risk in portfolios than earlier in the economic expansion, Astorri said, having made adjustments to positions including in equities. More funds are now going to “mid-risk” assets like property and infrastructure, he said.

“We don’t know exactly when, but we know that it’s coming and you’re getting closer to it,” Astorri said in reference to the cycle ending. “Hence we’ve been dialing things back a bit.”

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