Interest Rate Strategy

NZGB June supply outlook

Nick Smyth -

NZDM has announced its bond tender schedule for the month of June. The weekly pace of tender issuance remains at $1.05b and the split of bonds per tender is exactly the same as May. All bonds will be tendered during the month except for the May-2021 and the May-2031. There are four weekly tenders listed for the month, but one will be cancelled the week of the May-2024 bond syndication.

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One month into QE – just who was selling to the RBNZ?

Nick Smyth -

Earlier this week, the RBNZ released the breakdown of investor holdings for NZGBs for April. This is the first real snapshot of the market post RBNZ QE (which started on the 25th of March). Here are the key takeaways.

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Potential NZGB Inclusion In Global Bond Indices

Nick Smyth -

New Zealand is a high credit quality market (AA+/Aaa) but has historically failed to meet most benchmark providers’ eligibility criteria based on market size. That is set to change over the coming few years, with the NZGB market set to grow enormously. Based on forecasts from New Zealand Debt Management (NZDM), the nominal NZGB market will grow from the current $65b (US$40b) to around $120b (US$72b) by June 2021 and around $200b (US$120b) by June 2024.

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The Antipodean Paradox

Nick Smyth -

In late April, we published a note arguing that the more aggressive nature of RBNZ QE compared to the RBA’s YCC would drive further NZGB-ACGB spread compression (see NZGB-ACGB Spread Outlook – RBNZ QE To Drive Further Compression). The move has played out quicker, and to a greater extent, than we had anticipated. The 10-year spread in swaps has compressed by around 20bps and the NZGB-ACGB 2037 spread by around 40bps (see Chart 1). We think the move is now overdone and risk-reward favours NZGB-ACGB wideners.

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Outlook for Borrowers: Post-May MPS

Nick Smyth -

As widely expected, the RBNZ kept the OCR at 0.25% at the May MPS. The RBNZ chose to add more stimulus by increasing its Large-Scale Asset Purchase programme (otherwise known as quantitative easing, or ‘QE’) from the current $33b to a maximum of $60b. Through this QE programme, the RBNZ buys government and local government bonds in order to force down longer-term interest rates in New Zealand.

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QE Has Its Limits – The Importance Of The 50% Cap For Nominals

Nick Smyth -

After yesterday’s bond programme announcement from NZDM, there has been speculation that the RBNZ will just increase the size of its QE programme, to absorb the increase in bond supply and limit any upward move in longer-term interest rates.

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RBNZ Review – Bond Market Implications

Nick Smyth -

The lead-up to the meeting was dominated by speculation the Bank could soften its forward guidance, giving itself the option to cut the OCR to negative later in the year. Immediately prior to the decision, the market was pricing the November meeting at 0.05%, implying 20bps of cuts by the end of the year.

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NZDM trumps RBNZ

Nick Smyth -

NZDM announced a record $60b bond programme for the coming fiscal year (ended Jun-2021). This is $50b higher than the previous forecast from December’s HYEFU. In net terms, issuance will be close to $50b in the coming fiscal year (~20%/GDP).

Bond issuance was significantly increased for future fiscal years as well. Net issuance in FY21/22 was increased from $8b to $40b. The NZGB market is now forecast to be $213b in Jun-2024 compared to just $87b at the time of the December HYEFU.

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Bond Programme Preview

Nick Smyth -

NZDM releases its bond programme on 14th May, alongside Budget 2020.

The market’s primary focus will be on the size of the programme over the coming 12 months. We have pencilled in a bond programme of $50b for FY20/21 (~$39b net issuance), although this is subject to considerable uncertainty.

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RBNZ May MPS – What We Expect For The Bond Market

Nick Smyth -

Gone are the ‘old days’ when the RBNZ decision came down to a single number (the OCR) and the market would react to that and the tone of the accompanying commentary. With the RBNZ now active in the bond market, there are a number of different dimensions to RBNZ policy.

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NZGBs – tender Issuance Increased, 2024 Syndication Planned, Direct Monetary Financing

Nick Smyth -

This afternoon, New Zealand Debt Management (NZDM) released its bond tender schedule for the month of May. The weekly pace of bond tenders will step-up to $1.05b per week, from $800m this month. But total bond issuance will be lower in May ($4.2b vs. $6.7b) as there is no syndication planned for next month.

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NZGB-ACGB Spread Outlook – RBNZ QE To Drive Further Compression

Nick Smyth -

NZGB-ACGB spreads have compressed this year. At the start of the year, NZ had both a higher cash rate (1% vs. 0.75%) and term structure. The convergence in the RBNZ and RBA cash rates to 0.25% has helped drive spread compression in NZGBs and ACGBs. Our expectation is that RBA and RBNZ policy rates will be on hold, at this level, for the foreseeable future (we think it’s unlikely the RBNZ will cut the OCR to negative despite Governor Orr reiterating it remains a possibility down the line). Therefore, relative government bond supply and QE policies will have a greater bearing on long-end NZGB-ACGB spreads going forward.

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Negative Interest Rates In New Zealand – Still Unlikely?

Nick Smyth -

Back in mid-March – which feels like a long time ago now – RBNZ Governor Orr outlined the Bank’s playbook for unconventional policy. He indicated his preference for using a negative OCR as a first step into unconventional policy. Quantitative Easing (‘QE’) was further down the list.

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Could Yield Curve Control come to New Zealand?

Nick Smyth -

There have been suggestions that the RBNZ might adopt a Yield Curve Control (YCC) framework, similar to that currently in operation in Japan and Australia. In this note we describe what YCC is, what it intends to do, and whether its practical in a New Zealand context.

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Direct Monetary Financing: Could The RBNZ Bypass The Market And Buy Straight From NZDM?

Nick Smyth -

Last week, we heard that the Bank of England (BoE) and UK Treasury had agreed to an extension of the UK government’s ‘Ways and Means’ facility. This is essentially the overdraft facility that the government has at the BoE. It allows the UK government to draw down on funding directly from the BoE, without needing to use the market.

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An Early Look At The RBNZ QE Programme

NIck Smyth -

In this note, we take an early look at the results of the RBNZ’s QE buybacks to date and how the RBNZ’s QE programme stacks up compared to those of other central banks and NZDM issuance.

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Have NZGBs Cheapened Enough? A Cross-Market Analysis

Nick Smyth -

Last August, we made the case that foreign demand for NZGBs would remain subdued, in the absence of NZGBs cheapening on a cross-market basis. At the time, NZGB yields were trading well below those of US Treasuries.
Since then, NZGBs have cheapened significantly on a cross-market basis. Here we look at some cross-market valuation measures, both on an FX-hedged and unhedged basis.

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QE Programme Size, Linkers And Corporates

Nick Smyth -

RBNZ Assistant Governor Hawkesby spoke in a Bloomberg interview earlier today. Here we summarise the key takeaways and our thoughts:

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NZDM Taps 2031 Bond For A Record $3.5b – Thoughts and Implications

Nick Smyth -

A short while ago, NZDM priced its syndicated tap of the 2031 NZGB. The size of the tap was $3.5b, a record amount for a New Zealand syndication (which have typically been $2b). The deal priced at a spread of +32bps to the 2029 NZGB, the tight-end of initial price guidance, but 5bps steeper than pre-launch secondary market levels. The deal was oversubscribed, with a total book size over $5b (within the initial price guidance range).

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RBNZ Adds LGFA to its QE Programme

Nick Smyth -

The RBNZ today announced that it is adding the New Zealand Local Government Funding Agency (LGFA) to its QE programme. It intends to buy $3b in LGFA debt over the coming 12 months. This enlarges its QE programme to $33b.

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RBNZ Confirms It Will Buy LGFA Bonds On Small-Scale

Nick Smyth -

This morning, the RBNZ confirmed it would start buying bonds issued by the New Zealand Local Government Funding Agency (LGFA). The news had been foreshadowed in a Newsroom article published on Friday, in which Assistant Governor Hawkesby was interviewed. See our note from Friday afternoon (RBNZ Officials Signal Possible Purchases Of Local Government Bonds) for more information on the context for the decision.

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RBNZ Officials Signal Possible Purchases Of Local Government Bonds

Nick Smyth -

RBNZ Governor Orr and Assistant Governor Hawkesby have both spoken to NZ media today, signalling that the RBNZ is prepared to upsize and expand the scope of its QE programme.

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Outlook for Borrowers: April Update

Nick Smyth -

Since we published our last Borrowers Outlook, things have gone from bad to worse for the global economy and markets. COVID-19 continues to spread rapidly around the world and governments (including in New Zealand) have responded with social distancing measures, intended to slow the spread to the virus and reduce the pressure on health care systems. But the lockdowns enacted in a number of countries come with a heavy economic cost.

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NZDM announces massive increase to bond programme

Nick Smyth -

NZDM has announced a huge increase to its bond programme over the next three months. It will raise $17b via nominal bond issuance and more than $3b through increased Treasury bill issuance by end-June.

Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.

Term premium and the bond-equity correlation

Nick Smyth -

Estimates of the US 10y bond term premium have been negative most of the time since 2016. This is historically unprecedented.
One of the arguments for a negative term premium is that mutli-asset funds are prepared to ‘pay up’ for the portfolio protection that government bonds provide (govt. bonds typically rally when equities fall).


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RBNZ fires the bazooka - a huge $30b QE programme

Nick Smyth -

The RBNZ today announced a huge $30b government bond QE programme, to take place over the next 12 months. This size of the programme is massive – it equates to around 10% of NZ GDP and 50% of the current size of the nominal government bond market. Here we look at the possible implications for NZGB yields and the broader NZ market.

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RBNZ announces liquidity measures – a positive step forward, but QE is still essential

Nick Smyth -

• The RBNZ announced a range of liquidity measures.
• The RBNZ has removed banks’ ESAS limits, opening the dollar to a significant injection of liquidity.
• Liquidity will be injected via both FX swaps and the reinstated Term Auction Facility, which offers banks term funding (up to 1yr) against a range of collateral.
• Large liquidity injections should help the NZD FX basis and FRA-OIS spreads normalise from elevated levels.
• This should put downward pressure on short-end swap rates. It has also supported short-dated NZGBs.
• The RBNZ should reduce the rates for lending against Housing NZ and local government (LGFA) bonds. This will help market function in the high-grade market.
• The RBNZ is fulfilling its role as a liquidity provider to the financial system. But we believe it should also step-in as the market-maker of last resort and announce its intention to buy NZGBs via a QE programme. This is a separate issue that we believe the RBNZ will address soon


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Huge Moves In NZGBs And NZ Fixed Income – Growing Risk That RBNZ QE Is Announced Imminently

Nick Smyth -

There have been huge moves across different segments of the NZ fixed income market since the market turmoil kicked off. This includes the NZGB market, the most liquid part of the cash bond market. The long-end of the NZGB curve has come under significant pressure over the past few weeks and has cheapened on multiple metrics.

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NZGB market thoughts after the government’s fiscal stimulus package – long-end NZGBs getting very cheap

Nick Smyth -

The government has announced a stimulus package worth $12.1b. New Zealand Debt Management (NZDM) has updated its bond programme. Here we briefly summarise the relevant information from an NZGB market perspective and outline our initial thoughts.

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RBNZ cuts to 0.25%, signals QE as next step for easing – initial thoughts

Nick Smyth -

After the RBNZ’s emergency policy actions today, the OIS curve out to 1 year should be flat at 0.25%. NZ OIS is based on the OCR (not traded rates), so OIS should not fall below this level, even with more liquidity in the system.

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RBNZ unconventional monetary policy options – initial thoughts

Nick Smyth -

Earlier this week, RBNZ Governor Orr released a speech outlining the RBNZ’s high-level principles on unconventional monetary policy. There was an accompanying document providing some background information and Governor Orr elaborated further on the topic in an interview with Bloomberg later in the day. Here we provide a brief summary and our initial thoughts.

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Outlook for Borrowers: Interim March Update

Nick Smyh -

A lot has changed since we published our post-February MPS Borrowers Outlook. At that time, we highlighted the COVID-19 outbreak as the key factor that would drive market movements in the near-term. We thought it was reasonable to wait for more evidence that the outbreak is coming under control before hedging.

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Swap-bond spreads – not a fear index, a supply gauge

Nick Smyth -

Swap-bond spreads have had a big move tighter over the past few days (see chart). The 10-year swap spread tightened 12bps over the three trading sessions to Wednesday (i.e. NZGB underperformed swap), while the swap-bond spread on the 2037 NZGB tightened 17bps. The move in 2037s is the biggest three-day move for any bond on the curve since at least 2014. Swap-bond spreads are negative for all bonds five years and longer.

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