Most Australian bonds bought by foreigners: central bank

Australia's good credit rating is attracting more foreigners, who are buying most of Australia's bonds, the central bank said on Monday.

The Reserve Bank of Australia (RBA) Assistant Governor Guy Debelle told a Sydney business function that foreign investors were buying more bonds because of Australia's AAA credit rating, and that people from overseas had bought the vast majority of commonwealth government securities.

"The vast majority of the post-crisis CGS (Commonwealth Government Securities) issuance has been purchased by non- residents attracted to the Australian government's AAA credit rating and favorable level of yields relative to other highly rated sovereign issuers," he said.

He said there was strong foreign demand for Australian government debt, with a six-fold increase in non-residents' holdings of Commonwealth securities since 2007. Non-residents now hold more than two-thirds of Commonwealth government bonds.

Debelle said expectation that U.S. Federal Reserve would raise interest rates and the European Central Bank's quantitative easing program would force yields to decline.

"At the shorter end, the February reduction in the cash rate target and associated repricing of market expectations for future monetary policy have contributed to a decline in yields," he said.

"At the longer end, there has been a tendency for yields to follow developments in global markets."

"While the strong historical correlation between yields on long- term Australian and U.S. government bonds has been evident, the spread between 10-year yields has narrowed considerably, declining from 100 basis points in the middle of last year to be as low as 40 basis points."

Debelle said investors need to be aware of the changed market dynamics and factor the higher transactions costs in fixed income, and particularly the higher cost of liquidity provision, into their decision-making. Endi