One Big (Bond Market) Reason to Care About Australian Politics

(Bloomberg) -- Australia — land of cute koalas, savory sausage rolls, and even tastier top-tier credit ratings.

The weekend's political turmoil is expected to put further pressure on Australia's AAA rating, which has already been on threat for downgrade for some time thanks to concerns over the country's debt levels.

The drama down under means the world of government debt is in danger of losing yet another source of triple-A rated investment — and crucially, one of the highest-yielding sources of AAA bonds in the sovereign space. Australia is one of only 1o countries that carry a triple-A designation from all three major credit rating agencies and a yield on its 10-year bonds — at almost 2 percent — that exceeds similarly-rated peers.

"The Australian bond market at least offers the highest yield and reasonable liquidity — as a result of persistent budget deficits," wrote Bank of America Corp. analysts led by Tony Morriss.

While the impact on local markets is up for debate, the loss of one of the few sources of safety — as judged by credit rating agencies — and yield will likely be mourned by investors. A working paper published by the Bank for International Settlements last month noted that the financial system has a somewhat unnerving tendency to attempt to offset a shrinking supply of "safe" securities through the manufacturing of other alternatives.

To contact the author of this story: Tracy Alloway in Abu Dhabi at talloway@bloomberg.net.

To contact the editor responsible for this story: Joe Weisenthal at jweisenthal@bloomberg.net.