New Zealand investors have fewer choices to invest in quality bonds than those in Australia, Europe, Britain and the United States. There is a corporate bond market run by the NZX that has grown, but it has a relatively thin spread of companies and government authorities offering relatively few bonds. This has been a problem for both savers and borrowers. 'Mum and Dad' investors looking for investments that generate a regular income that is slightly more than what they can get in the bank have tended, in the past, to go for finance companies and mortgage trusts. This has been a painful experience for many. There is currently NZ$5.969 billion frozen in 177,481 accounts in 43 finance companies, mortgage trusts and mortgage-linked investment funds, according to our 'Deep Freeze' list on interest.co.nz. Investors have now rushed to the relative safety of banks, but their returns are low and getting lower as the Reserve Bank cuts the Official Cash Rate, possibly as low as 3.25% next year, according to JP Morgan.
The advent of the Government guarantee scheme for retail deposits up to NZ$1 million in banks, finance companies, building societies and credit unions has changed the landscape somewhat. The initial thought was that it would encourage investors looking for higher yield with low risk to go for finance companies that offer high rates with a 'free' government guarantee. The theory was this shift to guaranteed institutions would make it very difficult for corporate and other bond issuers to attract 'Mum and Dad' investors, given they lack the same guarantee. But it hasn't quite worked out that way. Finance companies slashed their interest rates this week in anticipation of receiving their guarantees and as their coffers have been filled in recent weeks by an influx of relieved investors wanting high interest rates. Marac Finance cut its 12 month rate from 8.75% to 8.25%, while South Canterbury cut its two year debenture rate from 10% to 8.2%. See deposit and debenture rates up to one year here and rates of one year and longer here. These rates are likely to keep falling as the OCR is cut and finance companies struggle to find quality lending opportunities to use all this extra money. Also, corporate bonds have not been as unpopular in the current environment as many expected. Auckland Airport raised NZ$130 million through an issue of 8 year bonds with an 8% interest rate and described demand as 'hot' despite the guarantee scheme. Power generator Trustpower is also looking to raise NZ$100 million through a 7 year bond issue with an 8.4% interest rate. So there are still opportunities for bond issuers and demand from investors. This also opens up a huge opportunity for both central and local governments to raise money for infrastructure projects through bond issues that are traded on the NZX's debt market, the NZDX. Until now, the government borrowers have either paid for infrastructure through tax or rates revenue in a 'hand to mouth' way or have issued government bonds aimed at foreign investors. Japanese investors have gobbled up New Zealand government bonds and have kept the borrowing costs low, but it has made these bonds unattractive for New Zealand investors used to higher rates. Now those Japanese investors are no longer so keen on New Zealand, given its lower rates and weak currency, there is an opportunity for governments to raise the money needed for massive infrastructure spending with infrastructure bonds aimed at 'Mums and Dads'. It may require governments to pay a bit more, but it will encourage the sort of domestic savings needed to build the economy, while avoiding the foreign borrowing that built up household debts so high. John Key should make building an ecosystem of local and central government infrastructure bonds for "˜Mums and Dads' a top priority.