FOREIGN investors' hunger for Australian government debt appears to be waning, with overseas buying of bonds slowing to a four-year low.
Overseas investment managers added $1.3 billion of Australian bonds to their portfolios in the latest September quarter - the smallest increase since the early days of the global financial crisis in June 2008.
Foreign capital in search of a haven flooded into Australian government bonds earlier this year, and the trend has been blamed for keeping the dollar high despite weaker export prices. But an analysis by JPMorgan's interest rate strategist, Sally Auld, has found foreign demand for the assets is easing.
In the three months to September, foreign buyers snapped up 9 per cent of new bonds issued by the government - a far cry from the 88 per cent of issuance bought by foreign investors in 2010-11. Although the trend is in its early days, she said lower interest from overseas suggested the sharp lift in buying by foreign funds was probably complete.
''We would argue that this dynamic is broadly consistent with the idea that much of the new reserve allocation by offshore central banks and sovereign wealth funds into $A fixed income is now in the past,'' she said.
The figures also showed that the share of the $254 billion Commonwealth bond market owned by foreigners had slipped to 74.4 per cent, down from a record high of 79 per cent in the March quarter.
With many economists sceptical about the government's pledge to deliver a budget surplus this financial year, Ms Auld raised the prospect of weak overseas demand at a time when the government may need to continue borrowing.
But she said foreign interest in Australian assets was unlikely to decline sharply, due to Australia's economic strength and the relatively high returns offered to investors. Commonwealth government bonds have offered investors a yield up to 167 basis points higher than other AAA-rated countries - and tough new capital rules for banks are expected to further stoke demand for government paper.
TD Securities' head of Asia-Pacific research Annette Beacher said the bonds would continue to attract strong investor interest even if the Reserve Bank cut the cash rate further next year.