A handful of bidders are dominating Australlian government bond auctions, with most buyers getting less than they want of the world's highest-yielding AAA debt.
Australia attracted a record $230 billion of offers for bonds at auctions this year, data from the government funding arm show.
Six or fewer bidders per sale received all they wanted on average, the least since 2007.
Foreign investors including central banks and Japanese money managers hold about 70 per cent of Australia's government debt.
The Reserve Bank of Australia has said demand from abroad for government bonds contributes to an exchange rate at unhelpful levels as the economy suffers from the fading mining investment boom.
Benchmark 10-year notes offer 1.8 percentage points more in yield than the average for the other seven sovereign markets with AAA scores from all three major ratings agencies.
"One of the clear things Australia has had going for it in terms of attracting offshore interest is that rates here are higher across the yield curve," said Simon Doyle, who oversees $16 billion as the head of fixed income at Schroder Investment Management in Sydney.
"Australian government bonds do look attractive, certainly in headline terms, to offshore investors."
Strongest Rally
Sovereign notes are headed for their strongest annual rally since 2011 as slowing global growth and a resilient local currency hamper the economy.
They delivered a 7.5 per cent return this year so far, according to Bloomberg AusBond indexes.
Last year, the notes returned just 0.3 per cent when 10-year yields climbed 96 basis points for their first increase since 2009.
The RBA has kept its cash target unchanged at a record low 2.5 percent for 15 months as it seeks to encourage spending by consumers and companies.
Still, the benchmark rate remains the highest among major developed economies outside New Zealand, helping fuel demand for Australia's assets.
Unprecedented levels of easing from the European Central Bank and the Bank of Japan have helped to drive down yields globally as the monetary authorities seek to counter the threat of deflations.
Australian benchmark debt yields about one percentage point more than bonds from Italy, which is rated eight steps lower by both Moody's Investors Service and Standard & Poor's, just two grades above junk.
Crowded Out
"There are certainly secondary effects from the Japanese and European quantitative easing programs on the Australian market, with investors elsewhere possibly getting crowded out and driven toward Aussie bonds," said Anthony Kirkham, who oversees about $20 billion in fixed income as head of investments and Australian operations at Western Asset Management in Melbourne.
"Yields stand out here relative to what's available elsewhere."
Investor demand for the nation's debt has driven the Australian 10-year yield down 1.11 percentage point this year to 3.13 per cent late Wednesday, having reached an 18-month low of 3.12 per cent earlier in the day.
Comparable Japanese bonds yielded 0.44 per cent and German securities were at 0.75 per cent. The equivalent US Treasury rate was 2.25 per cent.
Australia raised $58.9 billion so far this year through bond auctions as well as $14 billion through underwritten offerings arranged by banks.
The Australian Office of Financial Management has received bids for 4.03 times the amount of bonds offered this year in tenders, the highest bid-to-cover ratio since 2007.
On average, 14 bidders were successful at auction, down from 16 in 2013 and the least since 2008. Some 5.5 bidders per sale got the full amount they offered to purchase, dropping from 7.7 to the lowest level since 2007.
Australia sold an average of $5.1 billion a year of notes in the five fiscal years ended June 30, 2008 as the country maintained bonds outstanding at about $50 billion.
The government ramped up debt issuance after the 2008 global financial crisis and now has more than $310 billion of bonds on issue.
"In the context of Europe and Japan, Australia still looks like a relatively robust place to be investing," Schroder's Doyle said.
Bloomberg News
