BusinessDesk: NZ bond yields now lower than depths of GFC as investors flee from Europe

BusinessDesk: NZ bond yields now lower than depths of GFC as investors flee from Europe

By Jonathan Underhill

New Zealand government bond yields have fallen below the levels plumbed in the depths of the global financial crisis as overseas investors flee from the European sovereign bond market.

The yield on the benchmark 10-year bond sank to a record 3.87 percent yesterday, pushing below its low of early 2009, when it last approached 4 percent.

Even at historic low levels, New Zealand yields look relatively attractive compared to 10-year Treasuries at about 2 percent and German bunds at 1.81 percent. Italy’s 10-year note was last at 7 percent and Spain’s was at 6.41 percent, underlining the risk investors see in holding those securities as Europe grapples to contain its debt crisis.

“You know things in Europe have got bad when New Zealand gets talked about as a safe haven for global bond investors,” said Christian Hawkesby, head of fixed income at Harbour Asset Management in Wellington. “There has been strong demand from foreign investors looking for an alternative to the European government bond market, which is looking an increasingly vulnerable place to be.”

Rising borrowing costs in the euro zone has prompted the European Central Bank to buy Italian and Spanish bonds, though the move has prompted a clash of wills between France, which supports more buying by the ECB, and Germany, which wants to limit the central bank’s role. The Bank of England called the debt crisis the “single-biggest risk” to the UK economy.

For New Zealand, rallying government bonds mean the Treasury’s Debt Management Office has never been able to borrow fixed for 10 years more cheaply.

The DMO’s latest bond auction is today, for $500 million, made up of $200 million of 6 percent December 2017 bonds, $200 million of 5 percent March 2019 bonds and $100 million of 5.5 percent April 2023 bonds.

Helping drive down yields this week has been the maturity of Nov. 15 bonds, of which there was about $8.77 billion outstanding. That’s created a natural demand for longer-dated debt as fund managers look to re-invest.

Investors have also been more willing to hold bonds amid speculation the Reserve Bank won’t rush to raise the official cash rate from a record low 2.5 percent, given inflation pressures aren’t accelerating markedly and the domestic economy is struggling to pick up pace.

Traders are now pricing in a small cut to the OCR over the next 12 months, based on the Overnight Index Swap curve, with the December contract at 2.44 percent and March at 2.31 percent.


See our interactive bond rate charts here.

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Yields just ended a fair bit lower @ today's tender.

This looks like a distribution ramp from professional to retail - bid volumes were just too low, particularly for the 23's. 


Could you explain that 'distribution ramp' idea and say how you can tell it's retail buyers rather than professional buyers pushing down these yields?



Hi Bernard

A distribution ramp involves market makers pricing up the instrument prior to sale. In this case moving the yield offer to the left. Retail buyers are price takers.

If professional buyers were that keen It seems unusual for 6 bidders being required to make a total NZD 130 mllion (rather small) bid for the NZD 100 million 23's on offer.  

And notably the interpolated 23's swap handle has more than doubled from 16 to 39bps over, since last week's tender. It is difficult for non-pros to enter this market.  

 Or if none of the above is true - the government is the only viable conterparty in town and our swap market makers' credit worthiness could be under scrutiny. . 


Tis true plenty of retail deposit money around and very keen to invest in somethin' safe.

Should cashed up mums and dads expect then that their friendly private bankers will be ringing them up to sell them the stuff? I've always wondered why the government doesn't sell them directly to Mums and Dads at something better than the 3.5% they're getting for four year Kiwibonds at the moment.

Though I see the 5 year bonds sold today yielded 3.344%. Ouch.

Hence, I suppose, the amazing demand for the unsecured, subordinated bond from IAG.

Still can't quite believe they're going to sell more than NZ$300 mln of the stuff.



It is well past time NZDMO introduced this service to NZers.

Too many vested interests I guess.

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