Interest in local government bonds increasing

Speaking at yesterday's Meet the Managers forum in Auckland hosted by Heathcote Investment Partners, McEntee said both the demand for and the supply of bonds issued by local government entities is likely to increase significantly in the next few years.

He said local government bonds are an attractive investment because they offer higher returns than central government bonds (Forsyth Barr's local government bond fund is returning about 7.5%) but are relatively risk-free.

There has been no history of local government debt defaults in New Zealand, McEntee said.

"I looked for ages for a default and I couldn't find any so eventually I gave up, I think there was one in Thames during the Great Depression and Waiheke got into a bit of trouble during the 70s so it merged with the Auckland City Council."

And investors are going to get more opportunity to invest in these bonds, thanks to the emergence of listed local government bond funds (like the one run by Forsyth Barr) and due to the new Local Government Funding Agency, which will consolidate much local government borrowing.

McEntee said the amount of local government debt on issue was likely to rise from its current $5 billion to $10 billion in the next few years.

His colleague Kevin Stirrat, head of funds management at Forsyth Barr, told the forum bonds had outperformed equities for the last 30 years and were likely to continue to do so in the near future if current conditions of low interest rates and low inflation remain.

"For a whole generation of investors bonds have beaten equities - the last time that happened was prior to the civil war in the US so it is quite a rare phenomenon."

Comments from our readers

On 17 November 2011 at 4:00 pm brent sheather said:

forbars local govt bond fund will not be producing income any where near 7.5%.more like 5% before fees.oh dear.

On 18 November 2011 at 7:39 am Independent Observer said:

Brent - I don't know you, and we have never met... although have followed many of your rambles.

One thing that appears to be consistent in your commentary is the lack of robust research. I would be interested to understand this recent declaration of performance – which is at odds with what Forsyth Barr are suggesting – and common sense.

On 18 November 2011 at 10:13 am CJM said:

I was at the preso and I didn't really take the thrust of it that investors would be getting 7.5% pa on local authority bonds - more that if you going to invest in bonds, here is a fund you could consider instead of doing it yourself.

With the market yield on local authority bonds sub-5%, getting a 7.5% per annum return from here would require interest rates to fall each year to generate capital gains.

It could happen, but with 10-year Govt bonds down to 3.85%, sustained further drops might be getting harder.

If Forbar do think interest rates have a lot more to drop from here I would be interested in what their brokers are saying - presumably sell your shares!

Just because bonds have given 7.5% for the last two years does not mean present trends will continue.

If I was forced to pick a likely return on local authority bonds, I would pick 4%-5% per annum - around the market yield.

On 18 November 2011 at 3:35 pm brent sheather said:

It's not rocket science...look at the yields in the secondary market..we have a positively sloped yield curve and long dated Auckland City Council is yielding 5%.

Interest in local government bonds increasing

Local government bonds are becoming attractive for those seeking a safe fixed interest product with a reasonable return, Forsyth Barr investment manager Kevin McEntee says.

Thursday, November 17th 2011, 7:12AM 4 Comments

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