By Alex Tarrant
The New Zealand Debt Management Office (NZDMO) issued a record-equalling NZ$1 billion of longer-term debt on Thursday after seeing demand for New Zealand government securities rise in recent weeks, with yields for 2023 bonds falling to record lows of 4.45%.
DMO Treasurer Phil Combes, who has just arrived back from promoting NZ government debt to US investors in New York, told interest.co.nz he was pleased demand for government bonds was picking up again after subdued interest from mid-August to early September.
The billion dollar issue made up of 2013, 2015 and 2023 bonds was the largest tender since a record NZ$1 billion sale on April 21, as markets were wary of volatility in Europe, Combes said. The DMO decided on such a big size for the tender after canvassing potential demand from participating banks, something they do before each tender.
“Certainly for a period of three to four weeks [from mid August to early September], that demand was very subdued. We were getting very little indication of interest so we were holding small tenders as a result," Combes said.
“This time round, when we canvassed [demand] we had some specific interest from a number of banks, and it was on that basis that we went for the bigger tender," he said.
Yields had come down considerably and continued to come down close to record lows for the longer bonds.
“Typically for about a period of around 10 years, we were always a borrower of 10 year money for about 6%, and now we’re well through 4.5%,” Combes said.
Demand had been picking up since early September, although markets were quite volatile at the moment, Combes said.
“What we’ve tried to do for a few years now is tailor supply to demand. If demand picks up, we’re very happy to add more supply to the market, if it starts to fall away, we’ll trim back on supply. We’ve tried to be a responsive issuer and take into account market demand,” he said.
The NZDMO does not detail where the buyers are from, but Reserve Bank figures show foreign lenders buy about 60% of the bonds.
Gareth Vaughan reported in late May that China's sovereign wealth fund, the China Investment Corporation, may have set aside NZ$6 billion to invest in NZ government bonds and other assets in New Zealand. China's Vice Premier Hui Liangyu met New Zealand Government Ministers in Wellington this week to sign various investment agreements, including a arrangement for PwC to partner with the China Development Bank to lend for infrastructure rebuilding in Christchurch. See our earlier article on that here.
'Investors diversifying away from Europe'
Combes had just arrived back from a conference in New York organised to talk to US investors about Australian and New Zealand government debt. The NZDMO received a “pretty favourable” reaction from investors looking to diversify away from volatile European markets.
“There were a number of investors that have supported us, and looking to support us more, and we understood that there were one or two interested for the first time in participating [in tenders]. So we came away pretty pleased at the reaction we got,” Combes said.
"If you look at what’s going on in Europe in particular, it’s not surprising to us that you are getting investors thinking about perhaps reallocating away from the amount that’s invested, say, in Europe as a whole and looking to find other areas where they think the relative credit story’s more attractive,” he said.
Finance Minister Bill English has said the government needs to borrow around NZ$100 million a week over the next few years, down from about NZ$370 million a week last financial year.
China has repeatedly said it wants to diversify its foreign reserves into government bonds away from America and Europe.
The tender: September 29
April 2013 bonds: Coupon rate 6.5%; NZ$465 million worth of offers for NZ$200 million of bonds; average successful yield of 2.8%.
April 2015 bonds: Coupon rate 6%; NZ$897 million worth of offers for NZ$750 million of bonds; average successful yield of 3.29%.
April 2023 bonds: Coupon rate 5.5%; NZ$171 million worth of offers for NZ$50 million of bonds; average successful yield of 4.45%.