The New Zealand debt market is bracing for what will be a wall of government bond issuance, starting next month.
At last month’s budget, NZ Debt Management (NZDM) – part of the Treasury - outlined plans to raise $34 billion in fiscal 2024, $32b in 2025, $30b in 2026 and$24b in 2027.
For next year alone, the programme will be $4b higher than that telegraphed in the December fiscal update.
Pre-Covid, the December 2019 fiscal update outlined plans to raise a total of just $42b over the ensuing five years. At that time, the 2024 bond tender forecast was just $6b.
ANZ market strategist David Croy said the prospect of more government debt coming on stream was something of a dark cloud hanging over the market, even though it had been well telegraphed.
“There’s a 20 per cent uplift in the amount of Government bonds compared to last year that the market will have to absorb – that’s been well signalled.
“The market knows it’s coming but when it arrives, it will be felt,” he said.
As the current financial year draws to a close, NZDM has been routinely offering $400m in bonds each week.
From the next financial year starting on July 1, NZDM will take a more flexible approach involving the agency surveying the market to gauge the appetite for the size and composition of offers.
“The move to a more flexible approach begins in July and I guess the market does not have a lot of information on how that exactly will work,” Croy said.
“The assumption is that we will see a higher run rate of issuance – and more syndicated issuance – but I think the market is just going to wait and see what that looks like before reacting,” Croy said.
Syndications – when a group of banks is paid to drum up demand from other investors – are expected to form a large part of the Government’s bond borrowing regime.
Harbour Asset Management fixed income and currency strategist Hamish Pepper said the market faces a wall of Government paper - $120b of gross bond issuance - over the next four years.
“That’s more than we had in the previous four years, which of course included the Covid era, and the big economic stimulus that needed to be funded.
“We have actually got more bond issuance ahead of us than we have had behind us.
“What we had behind us was a huge amount, but the biggest issue is that, back in Covid times, you had the Reserve Bank buying bonds in a big way,” he said.
Without Reserve Bank support, the bond market will have to rely more on foreign investors – who already account for about 60 per cent of the market – because domestic demand alone would not be able to soak up the extra supply, he said.
The Reserve Bank has stopped supporting the NZ bond market through purchases.
NZDM has already indicated that future weekly bond tenders will be in the $350m to $650m range, compared to $400m now, and the assumption is syndications will be held three or four times a year, Pepper said.
With New Zealand now running large current account and fiscal deficits, investors will be looking to achieve higher yields from their government bonds, he said.
“The big question is, will they be successful in attracting demand when, unlike previous years, our yields are not significantly above those in other parts of the world.”
Net bond issuance, excluding rollovers, will be $15.2b in 2024, and $12.2b in 2025.
“With a high current account deficit and fiscal deficits running simultaneously, attracting the attention of the rating agencies, investors will start to seek more compensation for the risk that they take.”
Westpac senior markets strategist Imre Speizer said extra bond issuance does not always translate into higher yields.
“All else being equal, extra issuance would push up bond yields, but there are a lot of moving parts,” Speizer said.
“But usually, these increases in supply are not a major determinant in bond yields.”
ANZ’s Croy said that as the 2022/23 fiscal year draws to a close the focus naturally shifts to the next, and the hefty increase in bond issuance.
“We think tomorrow’s $400m tender will go well, as most have this month, especially with outright yields at current levels,” he said.
“But the focus of this week’s chart pack is on our expectations for the July tender schedule, which will be published next Wednesday, and how the syndication pipeline might look between now and December.
“As we have long said, we expect four or possibly five syndications this year, with the next one - the 2033s - likely in July,” he said.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
