LGFA tender result shows investors still chasing yield; reasonable new issue premium on offer for 2037 NZ government bond issue

By Kymberly Martin

There were only modest moves in NZ yields yesterday.

Swaps closed down 1-2bps, while NZGB yields closed flat to 1bps higher. Overnight, US yields traded a tight range.

Longer-dated NZGB yields traded a little lower yesterday morning. However the move was curtailed as the NZDMO formally announced the launch of its anticipated new NZGB 2037. It is scheduled to price today.

The NZDMO’s price guidance, at 25-31bps over the 14 April 2033 NZGB seems to offer a reasonable ‘new issue premium’ relative to quantitative calculations of relative value. This likely reflects a number of factors;

(i) the expectation that investors may need additional enticement to buy a bond which is notably longer than previously issued NZGBs (ii) recognition that the market may be more reticent to add to duration as it is slowly inching up its expectations of a further Fed hike by year-end (iii) the NZDMO balancing its stated funding aims: i.e. to provide value for NZ tax payers while also building loyalty from long-term investors.

We would expect the syndication to attract strong demand from investors with long-term liabilities. We expect it will likely be priced near the tighter end of the indicated range. This would still offer an outright yield of circa 2.88%. This is likely attractive in the current global environment.

Overall, we believe fundamentals for NZGBs are still very favourable (limited sovereign risk, constrained issuance over the next four years, an easing Central Bank and contained NZD risk). Once the syndication volume has been absorbed we expect NZGB outperformance relative to NZ swap and USTs can resume.

Yesterday’s LGFA bond tender also demonstrated that demand for NZD fixed income product remains solid. The auction attracted a sound 3x bid-to-cover ratio, weighted toward the longer-dated LGFA 2027 bonds. These bonds were sold at an average yield of 3.18%. This represents around 92bps over NZGBs.

There are no domestic data releases scheduled today, but a handful of offshore releases tonight. However, unless they throw up significant surprises, market response will likely be limited as it awaits Fed Chairperson, Yellen’s speech at the Jackson Hole symposium at weekend. Ahead of this the market prices 14bps of Fed hikes by year-end.

Daily swap rates

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Kymberly Martin is on the BNZ Research team. All its research is available here.