BusinessDesk: National victory may stoke appeal of NZ bonds in uncertain globe, AMP Capital says

By Paul McBeth

The incumbent National Party’s victory in last weekend’s elections may ultimately stoke demand for the nation’s government bonds, by offering continuity of policy in an increasingly uncertain world, AMP Capital Investors says.

National’s return, in what Prime Minister John Key says will be a government very similar to the last, was a great result for the local bond market, with policies including state asset sales limiting the need to repeat the last administration’s record debt sales, said AMP Capital’s NZ head of fixed interest, Grant Hassell.

Expectations of central bank interest rate hikes have reversed in recent months, with traders now betting there more scope for a cut to the official cash rate from a record low 2.5 percent in the next 12 months.

The 10-year government bond yield fell to a record low 3.82 percent on Nov. 17 and gained 4 basis points to 4.04 percent today. Three-month bank bills were little changed at 2.7 percent.

“Our central bank and Australia’s can still cut rates” which opens up opportunities for capital gain if new bonds are issued paying a lower interest rate, Hassell said.

Local expectations for interest rates have tapered off in recent months as the European debt crisis beds in, and the Reserve Bank was forced to put off a signalled interest rate hike to act as a buffer from the global woes.

Hassell expects European policymakers will reach some kind of agreement to shore up the region’s indebtedness, and it will probably see tighter conditions through government spending cuts rather than tighter monetary policy.

“That means interest rates can be lower than what they normally have been,” he said.

Last week, Bloomberg reported Boston-based bond fund Loomis Sayles & Co singled out New Zealand as the single most attractive country in terms of government, honesty and overall well-being from an investment point of view.

(BusinessDesk)