NZ govt bond yields rise slightly in Treasury's first tender since credit rating downgrade; 2023 bond yields up 13 bps to 4.58%

NZ govt bond yields rise slightly in Treasury's first tender since credit rating downgrade; 2023 bond yields up 13 bps to 4.58%

By Alex Tarrant

New Zealand government bond yields rose slightly in Treasury's first tender since the sovereign credit rating downgrade from Fitch and Standard & Poor's last Friday, with the yield for 2023 bonds up 13 basis points from a week ago.

The government's credit rating was downgraded to AA from AA+ on Friday, raising questions about how much the cost of the government's borrowing would rise, as New Zealand should be regarded as a riskier bet by investors.

Before the downgrade last week, Treasury's Debt Management Office raised NZ$1 billion in government debt at near record low yields. See more on last week's tender here.

See our full coverage of Friday's double downgrades from Fitch and Standard & Poor's here.

Finance Minister Bill English and Prime Minister John Key spent the week deflecting comments from the Opposition that highlighted the Prime Minister saying in 2009 that a downgrade may raise interest rates by 1-2%, based on Treasury advice.

That advice was right at the time, Key and English said this week, but it was a different situation now in the short-term. They pointed to economist comments that rates may rise about 10 bps, although rates could rise in the long-term, Key said.

New Zealand should still be regarded as a relatively safe investment against the backdrop of fears that some European sovereigns may default on obligations, notably Greece, Key and English said.

The tender

The NZDMO raised NZ$200 million, made up of 2015, 2019 and 2023 bonds.

The weighted average successful yield for 2015 bonds was 3.31%, up slightly from 3.29% a week ago. NZ$50 million was sought and raised, from NZ$122 million worth of bids.

The average yield for the 2019 bonds was 4.16%. The last time 2019 bonds were offered was on September 1, when the average yield was 4.42%, during a period where the NZDMO was experiencing weak demand, Treasurer Phil Combes told interest.co.nz last week. NZ$100 million was sought and raised, from NZ$405 million worth of bids.

The average yield for 2023 bonds was 4.58%, up from 4.45% a week ago. NZ$50 million was sought and raised, from NZ$190 million worth of bids.

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It would seem the government has been punished on fronts other than outright yield.

Today's 2019 and 2023 tender yields were paid through swaps by 3.341bps and 5.888bps respectively.

Last week the 2023 maturity was priced below interpolated swap yields by 6.759 bps.

Equally the spread to 10 year US treasuries widened 14 bps.

The weight of a single straw can break the legs of the strongest economy; just study Fibonacci.  Time is the only argument when debt is on an outward spiral and revenue is in collapse.  Credit can only become more expensive tomorrow.