By Craig Simpson
There is plenty of money still trying to find a home and this was evident in July where Westpac and ASB between them raised close to NZ$1 bln from new bond issues.
Westpac raised NZ$385 mln via three year floating rate notes at 75 bps over the 90-day bank bill rate, which would make the first coupon approximately 3.38% for the first quarter.
ASB via a dual tranche of five year fixed and five year floating rate notes raised a total of NZ$525 mln. The split between fixed and floating was roughly 50:50, with the fixed rate bonds attracting a coupon of 5.06% p.a. and the floating rate notes have their initial coupon set in early August. The ASB bonds replace a previous issue of NZ$475 mln which was paying interest at 8.52% p.a.
A large portion of the money raised by these two institutions was for floating rate notes which is becoming more popular amongst investors as interest rates look set to rise.
These securities provide one mechanism whereby investors can take advantage of rising interest rates without potentially suffering capital losses as so often happens with fixed rate bonds. Resetting securities are not without their risks as I alluded to in a previous story.
Not only were the banks active in raising capital but New Zealand's Debt Management Office (DMO) came to the market offering another tranche of inflation indexed bonds.
The tranche of $300 mln worth of the 20 September 2025 inflation-indexed New Zealand Government bonds received $446 mln worth of interest and the weighted average yield of 2.2455% was well above the yield of 1.4804% for the previous auction.
Further, the Local Government Funding Agency (LGFA) successfully auctioned NZ$195 mln worth of bonds. The NZ$185 mln worth of 8-year LGFA bonds will pay interest at 5.0304% p.a.
During the month we also had the RBNZ confirm NZ's Official Cash Rate (OCR) would remain at 2.5% for the time being. NZ swap rates reacted to rhetoric from Governor Wheeler and rose sharply higher.
Central bank's causing a stir
Markets have been on tenter hooks following the initial announcement of the US Fed's intention to taper back its US$85 bln per month bond purchase program. Since the Fed's initial announcement the US 10-year bond yield has risen by almost 100 bps.
Fed Chairman Ben Bernanke delivered his latest testimony to congress mid-month saying the tapering policy was not on a “pre-set course.”
Fed officials have also been busy highlighting to nervous investors tapering of asset purchases does not automatically imply the Fed will move to hike the Fed funds rate (the US equivalent of NZ's OCR).
Not to be outdone, the RBNZ caused a bit of a stir at its latest OCR Review. While the OCR was left unchanged as many expected, the tone of the press release was more hawkish than many anticipated. The RBNZ described the NZ$ as being “high” compared to their usual term of “overvalued” and there was acknowledgement the next OCR move would be up which will make some highly leveraged residential property investors a touch nervous.
The central bank has sharpened its warnings about rapid house price inflation in Auckland and Christchurch and has indicated it is watching closely how that inflation spreads into the wider economy.
“The extent of the monetary policy response will depend largely on the degree to which the growing momentum in the housing market and construction sector spills over into inflation pressures," Governor Graeme Wheeler said in an eight paragraph statement after the OCR decision.
Across the ditch in Australia the Reserve Bank of Australia (RBA) retains its easing bias and much of July was spent speculating on whether they would cut at their next meeting in August. Rhetoric from Governor Stevens late in July has another rate cut in August almost done and dusted. Markets are pricing in a high probability of a cut at their meeting on August 6.
S&P on the war path
Standard & Poor's saw it fit to downgraded Christchurch council's credit rating to A+ from AA- due to what they saw as 'significant issues' around the building consents process. Even worse for the council is the fact that S&P has retained a "negative" outlook on it, meaning that future downgrades can't be ruled out.
"The downgrades reflect the emergence of significant issues regarding CCC’s building consenting process, and the departure of multiple key staff. As a result, we have lowered our assessment of CCC’s political and managerial strength," Standard & Poor's credit analyst Claire Curtin said.
"Furthermore, the appointment of a Crown Manager reinforces our view that the New Zealand government (the Crown) is driving the reconstruction of the Canterbury region, of which Christchurch is the major city, and raises questions about CCC’s management strength, and whether further issues will emerge."
The downgrade of Christchurch City Council did not impact on the rating of Christchurch International Airport.
It doesn't get easier for Italy as S&P cut their rating to BBB (from BBB+) which now means Italian sovereign debt is just two notches above what the market would refer to as 'junk'. The outlook remains negative. The Italians managed to get away just under their maximum target of €6.5b worth of bonds immediately following the downgrade, however the bid-to-cover ratio was fairly slim at 1.3x, suggesting reduced appetite.
Market performance indicators
Bonds continue to throw what some in the markets have coined a 'taper tantrum', although the bond child was starting to calm down towards the end of the month.
In summary it has been a pretty miserable quarter for those investors who have invested into bonds for their low risk, capital security features.
Bonds continued to sell off in July with many of the main market indicators still in the red. The benchmark NZX Government Stock Index is showing a negative return for the past 12-months, as is the Citigroup World Global Bond Index unhedged in NZ$.
Many of the bond indices are still in negative territory for the quarter. The exception is the Citigroup World Global Bond Index unhedged in NZ$ terms which posted a return of +4.9% for the quarter.
Year-to-date the NZX Government Bond Index is down by approximately 1.5%.
Global bonds hedged back to NZ$ benefited from a drop in the NZ$ which negated the fall in bond values over the past quarter. However, both bond and currency markets have been volatile and those same unhedged investors will have experiences negative returns over the past month and 12-months assuming there was no active currency management being undertaken.
Some commentators are expecting volatility and uncertainty to continue in bond markets. With this in mind investors should be actively reviewing their portfolios with their financial advisers.
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