Government Bonds, Local Currency Have Biggest Losing Week So Far This Year

www.bloomberg.com Top News Sat, 15 Mar 2003, 10:08am EDT By Morag MacKinnon

Sydney, March 14 (Bloomberg) -- Australian bonds and the currency had their biggest losing week of the year as the U.S. struggled to win support from the United Nations Security Council to give Iraq an ultimatum to disarm.

The Australian dollar this week shed more than 2 U.S. cents, ending its run as the world's best-performing currency in 2003 in its worst week against the U.S. dollar since September 2001. Bonds fell, pushing yields to their biggest weekly gain since Jan. 3. Stocks gained on the week.

The yield on the benchmark 10-year bond dropped to a two-year low earlier this week as investors sought debt's haven on speculation the U.S. may lead a military attack on Iraq as soon as next week. In response to opposition from Security Council members, the Bush administration yesterday signaled it may extend diplomatic efforts to disarm Iraq, sending yields higher.

``The more conciliatory tone we are seeing from the White House has encouraged people to diminish their expectations for war, which is seeing equities bid and bonds sold,'' said Greg McKenna, a market strategist at National Australia Bank Ltd.

The 6.5 percent bond maturing in May 2013 fell 0.620, or A$6.20 per A$1,000 face amount, to 109.109 at 5:25 p.m. in Sydney. Its yield rose 8 basis points to 5.33 percent, a 19 basis point gain on the week. The yield on the 7.5 percent bond maturing in July 2005 rose 9 basis points to 4.56 percent. A basis point is 0.01 percentage point.

The Australian dollar bought 59.53 U.S. cents. The currency has lost almost 3 percent of its value against the dollar this week.

``Extra Mile''

President George W. Bush ``is willing to go the extra mile for diplomacy,'' and debate on a United Nations ultimatum for Iraq may go into next week, White House spokesman Ari Fleischer said yesterday.

Speculation about a U.S.-led attack on Iraq had spurred demand for the safest securities. Australian government bonds maturing in between 7 and 10 years have returned investors 9.6 percent this year, while Australia's benchmark S&P/ASX 200 index has dropped 8.4 percent.

Australia's S&P/ASX 200 stock index today had its biggest one- day gain since Aug. 7. It closed the week higher for the fourth time this year. Gains in stocks crimped demand for the safety of government debt.

The markets have anticipated a fair amount of war risk,'' said Julian Foxall, who helps manage A$8 billion ($4.8 billion) in global bonds at Pimco Australia Ltd. Pimco Australia is part of Pacific Investment Management Co., a unit of Allianz AG. They just want to lighten up on that risk position.''