Fixed Interest: Bond returns likely to mirror 03

Investment returns from the New Zealand bond market this year are likely to be similar to those achieved in 2003.

Wednesday, February 4th 2004, 10:49AM

Investment returns from the New Zealand bond market this year are likely to be similar to those achieved in 2003. Gross returns from cash assets will be close to 5.50% over the full year with returns from a Government stock portfolio achieving similar levels. A corporate bond portfolio will outperform both cash and Government Stock as the higher yield and generally sound balance sheets of companies in New Zealand provide an attractive combination.

Standard and Poors also recognise the improved credit worthiness of corporate New Zealand, and in their December publication of Credit Focus commented upon the improved outlook for global credit markets.

Investment flows should also support the bond market as a large volume of debt matures in the first half of 2004. Telecom alone has a maturity of $275mill bond issue on 15/3/04, which is primarily held by retail investors. Most of these funds will be looking for a new home and will likely flow back into the bond market.

In addition the Treasury, in their December Economic and Fiscal Update announced a cut in the Government borrowing programme of $1 billion in each of the next fiscal years.

Last year saw the introduction of structured credit products in the form of CDO's (collateralised debt obligations) to the retail market. These products were readily taken up by investors who were hungry for yield and the feel good factor of a credit rating.

CDO's are an innovative and interesting addition to the bond market it is important to recognise that the risks associated with CDO's are different than those of a conventional corporate bond. One is not necessarily better or worse however the two are sufficiently different that a straight comparison of interest rates and credit rating is not always valid.

The introduction of CDO's adds further complexity to the investment choices in the financial markets and increasingly informed professional advice is necessary to limit unforeseen risks when building a bond portfolio.

Fergus MacDonald is the head of fixed interest and currency at Guardian Trust Funds Management.

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Fixed Interest: Bond returns likely to mirror 03

Investment returns from the New Zealand bond market this year are likely to be similar to those achieved in 2003.

Wednesday, February 4th 2004, 10:49AM

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