Australia: Net portfolio debt inflow at 7 year lows - Westpac

Robert Rennie, Research Analyst at Westpac, suggests that there is a material softening in the portfolio inflows into Australia in the last couple of quarters and on a rolling 12m sum basis, net portfolio inflow into Australia has hit the lowest levels seen since the GFC.

Key Quotes

“Clearly there are a number of factors at work here, the most obvious being a sharp narrowing in yield spreads versus for instance the US$. With yield spreads in the 10yr sector dropping as low as 25bps recently, it’s not surprising to see demand for A$ government debt slow. The first half of this year saw the biggest net foreign sales of ACGBs since June 2008. On a wider basis, portfolio debt securities saw a net A$15.1bn of foreign selling, again, the largest amount seen since late 2008.

Australia runs a large current account deficit which needs to be fully funded. So where and how is Australia doing this? The answer to that question is in other forms of debt assets including intercompany loans, currency and deposits and other debts including loans.

This suggests that the inflows we are seeing at the moment are being driven more by carry than the desire to own the underlying asset, potentially adding to risks in the future.”