Government issues $7 billion four-year bond, its biggest ever, paying 0.50%

Bonds

Whopper NZ Government bond of $7 billion issued after $14 billion worth of bids, annual Government Bond Programme size increased by $4 billion to $29 billion

16th Jun 20, 2:16pm by Gareth Vaughan

The New Zealand Debt Management Office (NZDMO), a unit of Treasury, has issued a whopper $7 billion government bond which received $14 billion worth of bids.

Both are record figures for a NZ government bond, exceeding the previous high which was the $3.5 billion tap of an existing bond due to mature in 2031, which received $5 billion of bids in April this year.

"For New Zealand, the deal is enormous. It is twice as big as the previous largest syndication, the $3.5 billion syndicated tap of the May-2031 in early April this year. For context, the $7 billion size is as large as the entire 2017/18 bond programme was," BNZ interest rate strategist Nick Smyth says.

"Offshore investors, excluding those Australian-based, bought 36% of the deal, an impressive result considering offshore investors have been net sellers of this sector of the curve consistently over the past few years. This deal shows that offshore demand will be there if the relative value to other markets stacks up," Smyth added.

The NZDMO says the 2019/2020 Government Bond Programme has also been increased by $4 billion to $29 billion.

The NZDMO says the $7 billion nominal May 15, 2024 bond will pay investors an interest rate of 0.50% per annum. It has been issued via bank syndication featuring ANZ Bank New Zealand, Deutsche Bank, JP Morgan and the Westpac Banking Corporation.

"The bonds, which carry a coupon of 0.50%, were issued at a spread of 9 basis points over the 15 April 2023 nominal bond, at a yield to maturity of 0.4275%. Total book size, within the initial pricing guidance range of 9 to 12 basis points, exceeded NZ$14.0 billion." the NZDMO says.

The issue is due to settle on June 23, with no further issuance of the new bond before September.

"As previously announced, a further update to the core Crown borrowing programme is expected to occur alongside the Pre-Election Economic and Fiscal Update (PREFU) 2020 [in August]," the NZDMO says.

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17 Comments

by donny11 | 16th Jun 20, 2:49pm 1592275780

I imagine that the buyers of these bonds will end up selling them back to the reserve bank at a profit. Under the LSAP programme the reserve bank is buying up bonds on the secondary market. So treasury sells to a middle man who on sells to the RBNZ at a profit. What other explanation is there for investors to buy long term govt bonds that pay .5% when we are heading into an inflationary environment? The govt should just monetize the debt directly, by getting the Reserve bank to buy directly from the treasury. At least this way the NZ tax payer doesn't have any middle men clipping the ticket.

by Audaxes | 16th Jun 20, 5:43pm 1592286234

The government should avoid the cost of paying tribute to foreign owned banks seeking fee income and seek a consortium of local banks to buy the Crown's IOU and credit it's account at Westpac with their IOUs. And there would be no marked to market risk for the banks and no potential contingent interest rate risk for the state.

by Audaxes | 16th Jun 20, 3:56pm 1592279810

So treasury sells to a middle man who on sells to the RBNZ at a profit. What other explanation is there for investors to buy long term govt bonds that pay .5% when we are heading into an inflationary environment?

You answered your own question. The RBNZ scoops up the bonds, as you say, in exchange for inert reserves that are in receipt of a floating interest rate, currently set at 0.25% - ie OCR. The Crown has swapped fixed for floating rate payments to banks and taxpayers take the interest rate risk.

I can only guess the government believes forward inflation is a myth propagated by central banks and will end up in receipt of cash flows via the RBNZ as negative interest rates are imposed.

This is how the ECB has driven European banks towards bankruptcy. The future is digital accounts for all at the RBNZ and unelected officials (communism?) taking a deep step into our lives and pockets.

by Audaxes | 16th Jun 20, 2:54pm 1592276049

Obviously investors are concerned about the return of their money, rather than the return on it.

Liquidity preference rules supreme - not much hope for more risky private sector, productive enterprises seeking credit to underwrite employment.that are seemingly crowded out by the state - let's hope the government is competent at picking winners.

by bw | 16th Jun 20, 3:19pm 1592277553

"We're taking away your low-risk, high-yield investments by slashing interest rates to near-zero, but we're giving you endless asset bubbles as a new way to achieve reliable gains." This trade-off has worked for 20 years as the (Central Banks) hyper-inflated one asset bubble after another until they finally inflated everything to precarious extremes: The Everything Bubble of 2019 that started unravelling in September 2019, long before the pandemic. The Everything Bubble includes: stocks, housing, commercial real estate, corporate debt, junk bonds, CDOs, CLOs, bankrupt companies, phantom companies, etc (Central banks) inflated all these assets bubbles as a "can't lose" proposition for yield-starved institutions that can't survive on low-risk 1% Treasury yields. These institutions include public union pension funds, insurance companies, mutual funds, wealth management entities, hedge funds, banks and retirement fund managers. Asset bubbles are not a substitute for Treasury bonds and AA-rated corporate/municipal debt for one reason: Risk. Despite all the extravagant claims about risk being hedged, the reality is that risk cannot be made to disappear, it can only be transferred to others.
Asset bubbles are intrinsically unstable and therefore risky. All bubbles pop, period, and whoever is holding the bag as the bubble pops will suffer catastrophic losses.
Yields will remain near-zero while all the asset bubbles implode, destroying tens of trillions of dollars in phantom capital. The (Central Banks) grand bargain; offering inherently risky asset bubbles as a substitute for low-risk, high-yield bonds will collapse. Everyone with a stake in an asset bubble is about to have the risk they thought had vanished emerge as gravity."

(CH Smith)

by Independent_Observer | 16th Jun 20, 3:22pm 1592277749

You have a link to this bw?

by fortunr | 17th Jun 20, 11:51am 1592351470

Very interesting. It perfectly describes the suicidal policies of the Central Banks in the last few years. What is the source of this commentary?

by Ezy | 17th Jun 20, 7:32am 1592335978

Preserving purchasing power is where it's at right now. Go where the sentiment is - hint: not with the banks. Gold, silver, Bitcoin https://decrypt.co/32378/bitcoin-is-becoming-more-trustworthy-than-big-…

by RCD | 16th Jun 20, 3:10pm 1592277013

Thats great,
what about the new cases in NZ today, where is that going to leave us, re-infected and back to Level 4.?

It seems these new cases came to light amongst the free-mingling quarantine population, so someone is not doing their job right in that part of the system, i wonder how many more quarantine groups are equally ineffectually being held.?
No amount of hand wringing and empathy can fix this, it will take a very hard line approach to make it work

by pin3cone | 16th Jun 20, 3:37pm 1592278670

I agree, NZ will not be so forgiving if cases break out a second time. We're in the position now we should have been in before the initial escalating lock-down, we can't afford another lock-down.

by Te Kooti | 16th Jun 20, 4:03pm 1592280200

If that is the case and they were recent arrivals from Australia, that's the trans Tasman bubble dead in the water for at least another few months. Oh, apparently they originated from the UK.

by Offshore_FX_Trader | 16th Jun 20, 5:46pm 1592286360

Via Brisbane

by Hans Brink | 16th Jun 20, 9:46pm 1592300798

My confidence in the elimination of covid is wavering. All that lockdown and they let others bring covid in from overseas. All arrivals should be locked down hard until proved negative. No exceptions. And let it be known, everyone who wants to come here has to abide by quarantine rules, and cover the costs of hotel themselves. No charge for inforcement!

by Ezy | 17th Jun 20, 7:35am 1592336138

If we go back to level 4 I get the feeling that Black Lives might finally Matter enough here to stage our own homegrown riot.

by Offshore_FX_Trader | 16th Jun 20, 5:38pm 1592285912

No Bank or investor is going to go bankrupt on the scaremongering notion of 'negative ' interest rates when they can on sell (loan ) the funds to NZ businesses at a current going interest rate north of 9% for a cost of 0.5%
There are some very naive comments on this thread.
this is the whole point of why CB's and big money overseas consortiums have the privilege of 'first use of money'.
The real problem is this - if you are a business in NZ right now, try getting an affordable business loan from a bank currently.

by Boatman | 16th Jun 20, 7:38pm 1592293115

Wow .... we are in SERIOUS TROUBLE .......... these low interest rates seem like they are here until 2031 ......I will likely have died of old age by then!

Government is effectively printing money by issuing close -to zero coupon bonds on which they will pay almost zero interest.................. 0,5% will barely cover the cost of administering the issue .

by Realtor in France | 17th Jun 20, 9:06am 1592341581

Lock it in Eddie, low interest rates for along time to come.