NZGB issuance increased, but WGBI entry to help offset
NZDM announced a $26b increase to forecast bond issuance alongside today’s Budget. The increase to the bond programme mainly reflects the RBNZ’s intention to start selling its LSAP holdings of NZGBs – back to NZDM – from July. The RBNZ’s planned $5b per annum LSAP sales ($20b over the four years in the forecast horizon) directly increase NZDM’s funding requirement and have flowed through into a larger borrowing programme.
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NZGB issuance likely to be revised higher at Budget
NZDM will update the bond programme alongside the release of the Budget on May 19th.
For recollection, at its last update, at December’s HYEFU, NZDM slashed its bond programme by a cumulative $31b across the forecast horizon. This reduction to forecast bond issuance in December was driven by upward revisions to Treasury’s growth and tax revenue as well as NZDM’s decision to start running down its large liquid assets buffer. Issuance for the current 2021/22 fiscal year, ending in June, was marked down from $30b to just $20b.
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Outlook for Borrowers: Post-April MPR
The RBNZ raised the OCR by 50bps, to 1.50%, at yesterday’s MPR. Markets had been pricing around a 75% chance of such a move while economists had generally couched the decision as a line-ball call with a 25bps move.
NZ short end has room to rally further post RBNZ
We have been highlighting in recent research that we see value in short to mid curve NZ rates. We were too early on our received NZD 5yr swap trade idea, which we stopped out of a week ago, but we think the original rationale still holds. We had anticipated that global rates were due to consolidate and, with so much tightening priced into the NZ curve, the risk-reward looked attractive to receive NZ. As it happened, global rates continued to explode higher and NZ followed with little resistance, with investors wary of standing in the way of the market’s momentum.
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NZ rates update: Plenty of tightening priced in
NZ rates have started 2022 as they did 2021: surging higher. Swap rates across the curve have been setting fresh multi-year highs on a weekly basis. The surge higher in rates, which started in July last year, is now the largest post-GFC increase (see Chart 1). Indeed, if we connect the 2020 and 2021 moves together, this is by far the biggest increase in NZ rates since the GFC.
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NZ linkers update: longer-dated BEIs starting to look rich
Kiwi linkers have experienced stellar performance over the past few months. Since the end of January, nominal NZGB yields have increased by 60-70bps across the curve whereas real yields are 5-15bps higher between 2025 and 2035 and 6bps lower at the 2040 maturity. Most of the move has happened since the end of February, coinciding with the imposition of financial sanctions on Russia and the subsequent surge in commodity prices.
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Mortgage hedging set to remain a persistent force
The second half of last year saw a rush among New Zealand households to fix their mortgages for 2 years and longer. Between July and December, the total stock of fixed rate mortgages with a remaining tenor of longer than one year increased by $53b, a 78% increase (see the blue line in Chart 1)1. Most of this appears to have been for 2-year and 3-year terms, with a much smaller amount of 4 and 5-year also printed.
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Outlook for Borrowers: Post-February MPS
The RBNZ raised the OCR by 25bps, to 1%, at the MPS, as widely expected by economists and financial markets.
However, the tone of the statement was hawkish. Inflation is well above the 2% midpoint of the RBNZ’s target range and expected to remain so for several years. The labour market is extremely tight, with the unemployment rate at a record low of 3.2%. The RBNZ is concerned about the risk that above-target inflation could become entrenched in wage and price expectations.
RBNZ QT – RBNZ to sell NZGBs to NZDM from mid-year
At the MPS today, the RBNZ said it intends to start selling its NZGB holdings to NZDM from July, in addition to letting upcoming maturities roll off.
RBNZ NZGB sales will be $5b per year, in line with our thinking. The RBNZ’s holdings would fall to zero in 2027, assuming nothing happens in the intervening period to cause a change of plan.
RBNZ LSAP sales are likely to see NZDM lift its bond issuance forecasts when these are next updated in May, all else equal.
We don’t expect a large sustained impact on NZGB yields – NZ cross-market valuations remain attractive and we think NZGBs are likely to join the WGBI later this year. The RBNZ said it will hold its LGFA bonds to maturity.
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NZGBs Qualify For WGBI – Should Enter Index Late 2022
We believe NZGBs have qualified for the FTSE/Russell World Government Bond Index (WGBI), the primary global government bond benchmark for offshore investors.
FTSE Russell, the WGBI index administrator, took its semi-annual snapshot of market size on Friday night. Based on the 0.66965 NZD/USD exchange at the London 4pm fix, the USD value of eligible NZGBs was US$50.078b on our estimates, above the US$50b minimum threshold. NZGBs more comfortably met the €40b and ¥5tn minimum market size thresholds (€44.15b and ¥5.766tn respectively). Eligible NZGBs are nominal bonds that have a maturity longer than one year which are not owned by the RBNZ.
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