Australian Bonds Have Outperformed in 2012; China Believes This Trend Could Continue

CIO, Fixed Income

Australian bonds, like other top-rated government debt, have pushed through all-time lows in yields as investors search for high-quality debt in the face of economic uncertainty in Europe. The Australian dollar, while hardly moving in a straight line, has appreciated nearly 3% against the U.S. dollar in the first seven months of the year (New Zealand, the top developed market performer, has appreciated over 4%).1 As we previously discussed, investors could consider gaining exposure to Australia through the WisdomTree Australia & New Zealand Debt Fund (AUNZ). More recently, it was noted in the Wall Street Journal that China’s central bank is looking to invest not only in Australian government bonds but also in the debt of regional governments, the so-called semi-government market. Similar to the municipal market in the United States, capital raised by state governments in Australia helps fund public infrastructure investments and effectively manage state balance sheets. In October 2011, the WisdomTree Dreyfus New Zealand Dollar Fund was converted to the WisdomTree Australia & New Zealand Debt Fund. Using a structured investment process, the Fund buys bonds denominated in Australian and New Zealand dollars. Given the significant size difference between the two economies, the Fund uses gross domestic product (GDP) to target its investment mix (currently 88% Australia, 12% New Zealand). To gain exposure to Australian debt, the Fund seeks to invest in equal proportions across Australian government, semi-government and supranational issuers. While government yields have moved through all time lows, semi-government and supranational bonds have historically provided attractive risk-adjusted yield enhancement, with limited sacrifice in credit quality (semi-government bonds in AUNZ are currently rated AAA or AA+ by Standard and Poor’s2). Given the long-term focus of China’s investment horizon, this move by the Chinese government, should it occur, could provide a steady investment flow into the semi-government market, helping to support prices. As of July 31, the AUNZ portfolio yields 3.28% with a duration of 3.58 years. Compared to other high-credit-quality bonds, Australia and New Zealand could provide investors with a solid opportunity for higher yields as a portion of their developed market bond portfolio.   Learn more about WisdomTree’s Fixed Income ETFs. 1Source: Bloomberg, 2012. 2AAA: extremely strong capacity to meet financial commitments. Highest rating. AA: very strong capacity to meet financial commitments.

Important Risks Related to this Article

Past performance is not indicative of future results. There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Derivative investments can be volatile and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. The Fund focuses its investments in Australia and New Zealand, thereby increasing the impact of events and developments in Australia and New Zealand that can adversely affect performance. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition when interest rates fall income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Unlike typical exchange-traded funds, there is no index that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objective will depend on the effectiveness of the portfolio manager. Due to the investment strategy of this Fund it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

For more investing insights, check out our Economic & Market Outlook


About the Contributor
CIO, Fixed Income
Rick Harper serves as the Chief Investment Officer (CIO), Fixed Income at WisdomTree Asset Management, where he oversees the firm’s suite of fixed income and currency exchange-traded funds.  He is also a member of the WisdomTree Model Portfolio Investment Committee and takes a leading role in the management and oversight of the fixed income model allocations. Rick has 28 years investment experience in strategy and portfolio management positions at prominent investment firms. Prior to joining WisdomTree in 2007, Rick held senior level strategist roles with RBC Dain Rauscher, Bank One Capital Markets, ETF Advisors, and Nuveen Investments. At ETF Advisors, he was the portfolio manager and developer of some of the first fixed income exchange-traded funds. His research has been featured in leading periodicals including the Journal of Portfolio Management and the Journal of Indexes. He graduated from Emory University and earned his MBA at Indiana University.