Issuing debt for the sake of it

NZGB bond markets will get new issuance to maintain a sustainable market, not because the Government needs the funding. NZGB 10yr yield near its 2017 low

Bonds

NZGB bond markets will get new issuance to maintain a sustainable market, not because the Government needs the funding. NZGB 10yr yield near its 2017 low

26th May 17, 8:17am by Jason Wong

By Jason Wong

US Treasury rates are barely showing any change. The 10-year rate has traded in a 2.24-2.27% range.

A June rate hike by the Fed is still seen as a fairly high probability event, with about an 80% chance priced in, but the picture gets murkier from there, with only about 35 bps of hikes in total priced in through to year end.

The NZ rates market showed little reaction to the Budget.

The domestic bond programme was little changed and the government signalled that it recognises the importance of maintaining a sustainable NZGB market and intends to maintain levels of NZGBs on issue at not less than 20 percent of GDP over time. Issuing debt for the sake of it is a position that most other countries would envy.

A new 12-year nominal bond is expected to be launched, via syndication, before the end of the year. NZ’s 10-year bond closed the day flat at 2.84%, hovering around its lows for the year.

Daily swap rates

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Source: NZFMA

Jason Wong is on the BNZ Research team. All its research is available here.

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2 Comments

by Boatman | 26th May 17, 9:54am 1495749240

Am I understanding this correctly , we will be issuing Bonds to raise money which we dont need ?

Where is the logic in that ?

And why bother ?

by David Chaston | 26th May 17, 10:01am 1495749690

A fair question, but a functioning, normal bond market is important to have. Without the NZGB base, it can get quite distorted (as we saw when the Govt pulled right back in the 202-2007 period).

Yields get distorted with excessive demand, hurting investors seeking long term safety. And now we have a sizeable and growing flow of KiwiSaver funds at the conservative end any pullback would just make the distortions even greater. Currently demand for 'risk-free' fixed-income paper is high and growing. If you took out a key source of supply, things could get messy for investors who are risk averse.

We just don't have the local corporate issuance at high credit-rated levels. It's up to the Government.