Supply-Demand Dynamics Support LGFA Spread Tightening
LGFA is already well ahead of its funding task, just one month into the new fiscal year (ending June 2021). LGFA raised $1.1b in July ($900m via a dual tranche syndication and $200m via tender issuance), which equates to its entire forecast net issuance for the fiscal year. The residual $1.43b of forecast gross bond issuance to be raised by the end of June fully matches off against its May-2021 bond maturity.
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Kiwi linkers – it’s their time to perform
NZ linkers got battered during the crisis, but their inclusion in the RBNZ’s LSAP has been crucial in restoring some confidence in the market.
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RBNZ August Meeting – Bond Market Permutations
At the RBNZ’s June meeting, the Bank kept its policy settings unchanged but flagged a review at the August MPS. It said it would “reassess the appropriate quantum” of LSAP as well as discuss its readiness to use other unconventional policy tools, like a term lending facility, negative rates and FX intervention.
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An Initial Look at RV on the NZGB May 2041
Late last month, New Zealand Debt Management (NZDM) said it intended to syndicate a new May-2041 maturity NZGB in the week of 13th July. The May-2041 will be the longest bond on the curve, extending it by four years from the Apr-2037.
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Outlook for Borrowers: Post-June Monetary Policy Review
As universally expected, the RBNZ kept the OCR at 0.25% at the June Monetary Policy Review. The RBNZ had previously said that it would not consider any move in the OCR until March next year, at the earliest.
Despite the earlier-than-expected shift to COVID-19 Alert Level 1, the RBNZ remains cautious about the economic outlook. The balance of risks for the economy are still perceived to be to the downside.
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NZGB Supply Update
NZDM has released its bond tender schedule for the month of July, the first month of the 2020/21 fiscal year. The key announcement is that NZDM plans to syndicate a new May-2041 nominal NZGB in the week of the 13th July. This is the first long-dated (15yr+) syndication since 2016.
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RV Analysis Of The NZGB May 2024
NZDM today launched its new May-2024 bond syndication. The coupon on the bond is set at 0.5% and initial price guidance has been set at +9-12bps above the Apr-23. The bond is expected to price tomorrow (NZT). NZDM said it expects to issue “at least” $2b. This was the same size guidance NZDM provided before the May-31 syndicated tap in early April, in which it printed $3.5b.
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Trade idea: NZGB 2025/2033 Steepener
The short-end of the NZ curve has experienced a marked re-pricing since the aftermath of the May MPS. The market no longer prices a negative OCR for next year and rate cut pricing for 2020 has been significantly pared back. The repricing at the short-end of the NZ curve can be attributed to comments from RBNZ officials last month that suggest it is highly unlikely to cut the OCR before March next year and the faster-than-expected move to COVID Alert Level 1 in New Zealand (which entails few restrictions besides the border remaining closed). The terminal OCR is now priced around 0.05%.
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NZDM Issues A Record $7b Via May-2024 Syndication
Earlier today, NZDM issued a record $7b of its new May-2024 NZGB. For New Zealand, the deal is enormous. It is twice as big as the previous largest syndication (the $3.5b syndicated tap of the May-2031 in early April this year). For context, the $7b size is as large as the entire 2017/18 bond programme was.
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What To Make Of RBNZ Tapering?
Over the past month, we have been arguing that RBNZ QE was running at an unsustainably fast pace.1 For four weeks, between 20th April and 15th May, the RBNZ maintained a $1.35b per week purchase target for nominal NZGBs. Had it maintained purchases at this pace, it would have accumulated over $80b nominal NZGBs by June next year, or around 70% of the market. This would have breached the 50% limit on its holdings of nominal NZGBs, as set out in the indemnity from the Minister of Finance (which would have been reached around the turn of the year). For us, the only question was when the RBNZ would slow its purchase pace.
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NZGB June supply outlook
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?
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
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
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
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
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
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
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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