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Deficit funding tough in ‘stale’ bond market

After years of an almost “non-functioning” government bond market, the New Zealand Treasury may struggle to raise the debt necessary to fund projected deficits over the next five years, according to Grant Hassell, AMP Capital head of fixed interest.

Wednesday, October 8th 2008, 5:26AM

by David Chaplin

“It could be a challenge for Treasury to get bond issues out,” Hassell said. He said local institutions have steered clear of New Zealand government bonds as a lack of issue and strong demand from offshore investors has pushed up the price.

“The [NZ government bond market] has been devoid of sufficient issuance for so long that the market has gone stale,” Hassell said. “While it’s been running big surpluses the government just hasn’t issued enough bonds.”

However, as revealed on Monday in the pre-election fiscal update, Treasury has forecast government debt to balloon from the current level of 17.4% of GDP to 24.3% by 2013.

According to Hassell, with a lack of liquidity in the local market Treasury would be forced to rely on offshore investors to buy government bonds.

Currently, international investors already hold approximately 70% of New Zealand government debt - a proportion that has almost doubled since 2000.

He said the high global demand for NZ government bonds, though, was typically a currency play. With the kiwi now on the slide and international debt markets facing severe challenges, offshore investors would probably shy away from NZ government bonds.

“There’s a huge need [for the NZ government] to raise money but it will be competing with many other governments,” Hassell said. “I’m worried it won’t get the debt issue off at a low premium... yields might have to rise.”

But he said the New Zealand corporate bond market was alive and well with a “number of quality issuances now”.

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ANZ 4.44 3.15 3.25 3.39
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BNZ - Mortgage One 5.15 - - -
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Heartland Bank - Online - - - -
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HSBC Premier LVR > 80% - - - -
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