Investors pile into NZ govt debt

Government raises record-equalling NZ$1 bln of debt as demand returns; 'Investors looking to diversify away from volatile Europe'; Paying 4.45% for 12 yr bond

29th Sep 11, 4:05pm by Alex Tarrant

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%.

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6 Comments

by Stephen Hulme | 29th Sep 11, 7:24pm 1317277456

"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."

Issuance of new market debt by the NZDMO in the current year already totals: NZD 5.0840 billion. And we are only a quarter of the way there.

The Finance Minister by his own calculations will no doubt be instructing the NZDMO to curtail further borrowing after today's bonanza for the balance of 2011/12.

Taxpayers couldn't be so lucky.

The prefunded (on depo at RBNZ since last year) expiry of NZD 8.766 billion 6% 15 Nov 2011 notes will no doubt be deducted from current totals. Hence luring us into another misconception of how deeply in debt we are.

The kicked cans just get bigger.

by steven | 30th Sep 11, 7:14am 1317320046

Yet no one has the stomach to talk about a) raising taxes except Labour with a CGT and that's not to well received (but it will come) b) Slashing something big like closing all the public hospitals....so no more public health service.....of course the impact on GDP and our pockets as we have to then spend $300+ a month on health cover wont make sense.....but neither does much else....

Most voters are doing or accepting exactly whats going on, ie can kicking....few seem to be looking at greece and absorbing all the extra taxes being imposed in short measure.....to try and stay afloat....that's us ina decade if we carry on like this....and as lon as morons like JK promise us growth will fix things that is what will happen......Muldoon spending and Lange's forced response is adequate warning.

regards

by Alex13 | 30th Sep 11, 10:30am 1317331852

"Yet no one has the stomach to talk about ... raising taxes ... closing all the public hospitals....so no more public health service ..."

It’s more like not many have the insanity to seriously contemplate things like that!

While "public" spending does need to be cut, it is the bloated "public servants" staff numbers, salaries and perks that need to be cut (rather than health service), along with nonsensical "research" programs, absurd "cultural" funding and wasteful "advisory" expenses. Retain only the really necessary public expenses and there will be a lot less need to borrow. Then cut taxes accordingly and let people decide what they want to do with their money. This would create a renewed incentive to earn (and retain in one's pocket) more rather than work to fund the wasteful parasites, to increase productivity, which in turn will lead to higher living standards and to things like housing become “affordable”…

by Plan B | 30th Sep 11, 12:45am 1317296724

How much were New Zealanders able to buy?

by steven | 30th Sep 11, 7:07am 1317319669

Im not aware its limited, so you can buy as much as you want not sure if there is a min limit, Ive never bought bonds. Now if you were me (but had some $ ;] ) 4.45% for 12 years in a depression is very good going....If I had $100k spare, I think I'd put some money there....but I think I'd would have bought by now anyway.....it was well above 5% some months back. The risk of course is the Govn could default but with a National debt of only 30% I dont see that myself....the downside of course is if Labour got in and started to try and spend our way out....which apart from not working would make that a lot worse.....but you can always sell bonds if Labour gets in and go mental on us.

regards

by Stephen Hulme | 30th Sep 11, 9:49am 1317329340

@Steven - "Im not aware its limited, so you can buy as much as you want not sure if there is a min limit, Ive never bought bonds ."

In reality you are right - any private NZ individual can buy N Z Government debt. But the costs to do so for retail players are excessive - broker fees and spreads destroy the already real negative returns.

It's clearly a time for the NZDMO to introduce a service similar to US Treasury Direct - whereby minimum amounts of USD 1000 can be purchased by individuals at the highest auctioned/tender yield.

The current Kiwi bond (crown guaranteed) interest rate offerings are offensive if the same depositors are being called upon to service the debts of the nation at considerably higher yields.- savers are continuously treated like patsies - why?

But in all this it must be noted the crown needs foreign buyers utilising local bank credit lines to settle debt purchases as this instantly monetises the new paper offerings.

Domestic only government debt buyers are always sterlising new issuance by selling something to buy it. I believe it commonly termed 'crowding out'.

Furthermore, foreign traders are are utilising the low pegged OCR as a benchmark to finance position in a positive yield curve environment (borrow short, lend long) and are relatively indifferent to currency movement as long as the US Federal Reserve actions serve to reduce the yield on longer duration government debt.

Unfortunately this generous RBNZ sponsored service is priced away for so-called retail tradrers.

And to end this rant - the myth of our National debt quoted @ 30% of GDP needs to be exposed or at least detailed . On-lending a proportion of the notional gross government debt @ ~NZD 70 billion to already encumbered taxpayers (example student loans) in the form of additional local liabilities hardly constitutes a collective offset - some taxpayers just owe more than they can already pay compared to others - the collective liability remains the same.