Australian exceptionalism

Australian bonds are emerging as a compelling safehaven during global uncertainty. With real yields high and Australia's capital position improving, there is potential for Australian bonds to outperform regardless of short-term Reserve Bank of Australia policy moves.

There is a debate in the market about whether U.S. Treasuries are the safehaven asset that they once were. Indeed, there are many who argue that U.S. Treasuries are a potential source of risk to markets. With this in mind, it is instructive to think about the sorts of bonds that might be appealing relative to U.S. Treasuries, while investors make up their minds about the outlooks for bonds and global macro.

Searching for Alternatives: Bonds Beyond the U.S.

Looking across countries, there is a clear and negative relationship between real (or post-inflation) government bond yields, and net international investment positions (NIIPs). Countries with more positive (negative) NIIPs – that is, those that tend to export (import) more capital to (from) the rest of the world – also tend to have lower (higher) real yields. There are various explanations for this, however the main idea is that when a country has to net export (import) capital to (from) the rest of the world, it has an imbalance between its cash deposits, asset supply and growth prospects. Countries that net export capital typically have more cash deposits than assets to invest in. The capital or deposit glut pushes up domestic bond valuations and forces down their yields, until it becomes more attractive for capital to be parked abroad in foreign bond markets. On the flipside, countries that net import capital typically have strong growth opportunities that enable the payment of higher rates of return on their assets. 

Across countries, real yields are negatively related to NIIPs