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N.Z. to Boost 2023 Bond Sales to Meet Demand, Consider Linkers

New Zealand's Finance Minister Bill English
Bill English, New Zealand's deputy prime and finance minister. Photographer: Ian Waldie/Bloomberg

New Zealand plans to increase sales of longer-term government bonds and is considering its first inflation-indexed issue in 13 years as demand climbs for the nation’s securities, the developed world’s best-performing sovereign market over the past five years.

The Debt Management Office is interested in building up the volume of April 2023 notes, the longest-dated debt, toward a NZ$12 billion ($9.9 billion) limit, from NZ$3.7 billion, before issuing longer maturities, Brendon Doyle, treasurer of the Wellington-based funding arm, said in an interview.

New Zealand’s 10-year bond yield fell to a record this week and the nation’s debt has returned 60 percent over the past five years, the most across 26 sovereign bond indexes compiled by EFFAS and Bloomberg. The government last month said it will offer NZ$23.5 billion of bonds in 2012-14 to finance its budget deficit and refinance debt, including NZ$4 billion of inflation-indexed bonds, the first such offering since 1999.

“Demand still looks okay because we are getting done what we need to get done in a relatively orderly and effective way,” Doyle said. “We’re always interested in trying to develop new investor pools for different products. Inflation bonds allow us to access investors who might not be interested in nominal bonds.”

Record Yield

The yield on the benchmark 5.5 percent bond maturing April 2023 fell to 3.255 percent on June 5, the least ever in data compiled by Bloomberg going back to 1985. It was 3.42 percent as of 11 a.m. in Wellington. The Debt Office yesterday sold NZ$150 million of the notes at 3.39 percent.

The benchmark yield is 34 basis points higher than the Australian 10-year yield, near the 33 basis point average over the past 10 years.

Inflation-linked notes issued by governments worldwide returned 44 percent to investors over the past five years, Bank of America Merrill Lynch data show. That outpaced a 29 percent gain for sovereign bonds that aren’t tied to consumer prices and a 14 percent loss for the MSCI World Index of stocks, including reinvested dividends.

Issuing inflation-indexed bonds makes sense for a government that has long-dated assets like roads, and revenue streams that are sensitive to price movements, Doyle said. Possible investors include pension funds that have similar long-term liabilities, and may not currently be big investors in New Zealand debt, he said.

Inflation Debt

Initial feedback indicates offering inflation-linked notes won’t “cannibalize” existing sales, but the Debt Office needs to test that proposition to see how strong the demand actually is, he said.

The yield on New Zealand’s NZ$1.5 billion of 2016 inflation-indexed bonds, the nation’s only linkers outstanding, was 1.07 percent today, according to data compiled by Bloomberg. The government has NZ$70 billion of debt outstanding, according to figures compiled by Bloomberg.

The Debt Office last year investigated issuing an indexed bond maturing in September 2025 but deferred plans citing global conditions and a preference to focus on maintaining a supply of nominal bonds. Officials are talking to market participants to gauge what maturity suits best, Doyle said.

Foreign investors held 62 percent of government bonds on issue at April 30, up from 59 percent as of Dec. 31, according to central bank figures.

Finance Minister Bill English agreed to lift the limit on bond sales in the year ending June 30 to NZ$15 billion from NZ$13.5 billion to allow the Debt Office to tap extra demand.

With three scheduled auctions remaining, the Debt Office has sold about NZ$13 billion. Any amounts raised beyond NZ$13.5 billion will be used to refinance bills that mature in less than 12 months.

“In a general sense, more around matching the maturity profile of our assets, we’d have a desire to lengthen our yield curve through time,” Doyle said. “It makes sense for a long-dated holder of assets that the government is to do it that way, but you can’t do it at any cost.”

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