Australian Dollar Bond Market's Recovery May Be Short-Lived

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Australian Dollar Bond Market's Recovery May Be Short-Lived

Reports that the Australian dollar bond market has recovered from the announcement that offshore financings no longer would be exempt from a 10% withholding tax may be misleading. Several market sources say investors would do well to stay out of the market until the currency has been stable a month, and until the new budget is out.

The July 1 announcement by Paul Keating, the Australian treasurer, sent the market into a 40-basis-point plunge. Australian currency also cost 1 1/2% in value. "The market reacted so strongly to the news in part because it came on top of a generally more negative attitude toward Australian debt,' said a bond trader in London, who noted that the Australian dollar already had dropped about 12% earlier in the early summer and that Moody's Investors Service was rumored to be thinking of downgrading Australia to Aa.

During the last two weeks, the Australian domestic and Eurobond markets have climbed back up, regaining half of the value lost. They now appear firm, which may be illusory, several dealers warned this week. "The Australian government is probably propping up the bond market in advance of the [$448 million U.S.] in bonds it wants to do shortly,' a bond dealer at a U.S. investment bank said.

"The Market Could Plunge Again'

Market sources say the government plans to release two blocks of bonds in the five- to 10-year range. One tranche reportedly will yield 12 1/2% for July 1989, and another will yield 13% for July of 1996.

"The market could plunge again,' a bond dealer said, "and investors should wait, especially as the currency still looks very volatile. It will also take some time for the full ramifications of the tax change to be felt on the liquidity in the market.' Liquidity could be hit adversely by the possible effect of taxation on rollovers for swaps, because the main reason that the Australian bond market became so popular about eight months ago was that it offered lucrative swap opportunities. Some sources estimated that 80% of the market was swap-driven at that time.

Not only public and private bond issues from offshore facilities, but also all types of Euronotes, Euro and U.S. commercial paper, and multioption facilities are now subject to the hefty 10% withholding tax. Only bonds issued after July 1 are subject to tax, but rollovers of existing credits and tenders or drawdowns of Euronote facilities now are taxable too.

A lot of swaps have been done from Euronotes into fixed-rate Australian dollars, with the issuers traditionally using rollovers to get out of the swap positions and back into dollars. …