Inflation Indexed Bond tender number 522 results

Solid interest in latest Inflation Linked bond tender but just like the May issue a majority of bids were unsuccessful; weighted average yield 2.83% (2.80% last time)

Bonds

Solid interest in latest Inflation Linked bond tender but just like the May issue a majority of bids were unsuccessful; weighted average yield 2.83% (2.80% last time)

10th Jul 14, 2:30pm by Craig Simpson

The results from the latest inflation indexed bond offer by the Treasury's Debt Management Office have been released.

The coverage ratio was marginally down on the May tender and again a majority of bids were unsuccessful.

With the latest CPI number coming in at 1.50% pa. this would give the IIB's an indication nominal yield of approxinately 4.33%.

The current yield on the NZ government bond with the longest duration (maturing in 2023) is approximately 4.48%.

3.00% - 20 September 2030	Today # 522	Prior #519	Prior #517	Prior #515
*Series offered*	tender July 10, 2014	tender May 8, 2014	tender Apr 10, 2014	tender Mar 14, 2014
Total Amount Offered ($million)	200	200	200	200
Total Amount Allocated ($million)	200	200	200	200
Total Number of Bids Received	37	54	74	67
Total Amount of Bids Received ($million)	525	565	445	451
Total Number of Successful Bids	5	4	34	25
Highest Yield Accepted (%)	2.840	2.810	3.030	2.950
Lowest Yield Accepted (%)	2.825	2.790	2.980	2.880
Highest Yield Rejected (%)	3.000	2.995	3.190	3.175
Lowest Yield Rejected (%)	2.840	2.815	3.030	2.950
Weighted Average Accepted Yield (%)	2.8266	2.798	3.0116	2.9257
Weighted Average Rejected Yield (%)	2.8668	2.8496	3.0704	2.9884
Amount Allotted at Highest Accepted Yield as Percentage of Amount Bid at that Yield*	6.1	100	19	16
Coverage Ratio	2.625	2.825	2.225	2.255

*Individual allotments may vary due to rounding.

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1 Comments

by ACB | 11th Jul 14, 11:56am 1405036587

Craig

There is actually now a 2027 nominal bond to compare to.

As mentioned previously, looking at the past 12 months historical inflation number and assuming that will persist for the next 16 years when comparing to the nominal equivalent, is incorrect analysis and misleading for the average punter.

Instead, you should deduct the nominal yield from the 2027 nominal bond from the 2030 inflation linked bond real yield to determine the implied break even inflation rate. The break even inflation rate is the average expectation of inflation for the next 13-16 years in this case.

Or look at it this way:

nominal bond yield = expected inflation rate + real yield

Inflation linked bond yield = actual inflation rate + real yield

The difference in value between a nominal and inflation linked bond is therefore the difference between expected inflation and actual inflation i.e. unexpected inflation!

If the break even inflation rate implied by the market is more or less than what you as an investor expect, that informs your decision whether to be over or underweight inflation vs nominal bonds.