New Zealand Government bond tender undersubscribed for the first time in a decade

A blimp in demand for bonds sees tender undersubscribed. Photo / Andrew Warner

For the first time in a decade, a New Zealand Government Bond (NZGB) tender has been undersubscribed.

New Zealand Debt Management (which is part of the Treasury) on Thursday offered $200 million of bonds, due to mature in April 2033, but only received $189m of bids.

The bond was issued at a weighted average yield of 4.03 per cent, which was a few basis points above yields prevailing in the market before the tender.

The other two bonds New Zealand Debt Management offered at the tender (maturing in 2027 and 2051) were fully subscribed.

ANZ senior strategist David Croy noted this is the first time since 2012 that a nominal NZGB tender has been undersubscribed.

He believed it was an “isolated incident specific to today’s price action”, rather than a sign of a more systemic problem around demand for NZGBs.

A spokesperson for New Zealand Debt Management said an initial survey across the eight banks registered to place bids in the tender indicated there were no “clear or concerning factors”, and no issues related to the Government’s fiscal position.

“The average yield of the 2033 tender was close to the market yield prior to the tender, with the range of yields bid within normal ranges, all pointing to those bidding not having any concern with the bond, market risk, nor any other concerns,” the spokesperson said.

“Being $11m short on one of today’s particular bond tenders does not impact on the borrowing programme now or going forward, nor does it impact on the Crown’s ability to finance in any way.”

Coming back to Croy, he believed an over-reaction in US bond markets to a speech delivered by Federal Reserve chair Jerome Powell spilled over to New Zealand.

Traders here effectively over-reacted to an over-reaction in the US, creating a “peculiar” situation.

Croy said US 10-year Government Bond yields fell by 18 basis points to 3.60 per cent in response to Powell’s speech. This surprised NZGB traders.

“It’s unusual for the [New Zealand] market to open, having watched US bond yields fall so dramatically within a few hours,” he said.

Nonetheless, NZGB yields ended up correcting higher on Thursday following the unallotted tender result.

The New Zealand Debt Management spokesperson assured the other two bonds tendered on Thursday were well supported, with demand exceeding supply by a factor of 2.3 and 1.9 times for the 2027 and 2051 maturities respectively.

“It’s also important to note that only two weeks ago we were able to issue our inaugural 2034 Green Bond, raising $3 billion, with $7.5b of demand, and at the tight end (favourable) of the pricing range,” the spokesperson said.

Taking a step back, NZGB yields are widely expected to keep rising as the Reserve Bank has signalled its intention to keep lifting the official cash rate (OCR) aggressively from 4.25 per cent to a peak of 5.5 per cent.

New Zealand Debt Management will update its forecast bond issuance programme when the Treasury publishes its Half Year Economic and Fiscal Update on December 14.

Bond issuance is expected to remain elevated by historic standards.

The Treasury needs to get funds to buy NZGBs from the Reserve Bank, which is doing quantitative tightening - selling the bonds it printed money to buy in 2020 and 2021 when it wanted to put downward pressure on interest rates.