(Add comments on government debt)
By Cecile Lefort
SYDNEY, May 27 (Reuters) - Pimco, one of the world's biggest bond investors, is upbeat on Australian dollar bank subordinated bonds because they offer more reasonable valuations compared with two years ago, a contrast to the current negative yields of some sovereign bonds.
"The whole bank capital structure in the financial sector is improving with bond holders becoming more senior," Robert Mead, managing director and head of Pimco Australia's portfolio management, told Reuters on Friday.
Pimco has $1.5 trillion of funds under management worldwide.
"Spreads in Tier 1 and Tier 2 capital represent value," he added.
Tier 1 and Tier 2 notes are issued by banks to form part of their regulatory capital, which acts as buffers to protect depositors. Under this framework, noteholders rank ahead of shareholders in the event of bankruptcy.
Earlier this week, Westpac Bank WBC.AX , Australia's third largest bank by assets, raised A$1.45 billion ($1.05 billion) in Tier 1 capital at a margin of 490 basis points over the benchmark Bank Bill Swap rate, equivalent to an interest rate of around 7 percent.
Mead is also bullish on Australian dollar corporate bonds rated investment grade, but declined to cite specific issuers or sectors.
Given Australia's relatively high interest rates and subdued economic outlook, Mead said he prefers the nation's bonds over those of other developed countries such as Japan, Europe and the United States.
Australia's two-year bonds pay an eye-popping 1.7 percent AU2YT=RR compared with the negative yields of Germany, Italy, France and Japan. Ten-year bonds pay 2.3 percent, a hefty return versus the near zero percent rates of Japan and Germany.
While speculation is slowly mounting that Australia could lose its triple A ratings, Mead does not see this happening in the near-term.
"I am not overly worried about that as there aren't many triple A rated countries left so the benefits of a top rating are less valuable now," Mead said.
He said if Australia's credit ratings were cut, he would not anticipate any long-term impact on the pricing of its debt.
Earlier this month, Moody's warned that Australia was vulnerable to downside risks due to a slower pace of fiscal consolidation.
($1 = 1.3847 Australian dollars)