The Kauri bond market sprung to life last month with its biggest deal in seven years and a combined NZ$925 million raised through the two deals done, which is almost half as much as total Kauri bond issuance for all of 2012.
The two January issues saw the Nordic Investment Bank raise NZ$525 million through a five-year issue and the Asian Development Bank raise NZ$400 million in a five and a half year issue. (See further details on the two issues in the chart below). Kauri bonds are New Zealand dollar denominated securities registered in New Zealand and issued by a foreign issuer. Settlement takes place in New Zealand initially. But the security can then be held in other depositories around the world. See a Reserve Bank paper on the Kauri bond market here.
ANZ strategist Carrick Lucas notes in his bank's monthly Credit Focus report that the two supranational issuers took advantage of a window of investor demand as SSA (supranationals, sub-sovereigns and agencies) spreads widened to New Zealand Government stock, with the issuers themselves benefiting from positive NZ dollar basis swap spreads.
The Nordic Investment Bank deal, for which ANZ was the sole lead manager, was the biggest Kauri deal since 2006.
"This is a significant development given that Kauri issuance for the entire 2012 year totaled only NZ$2.3 billion," Lucas says.
The Nordic deal initially sought NZ$350 million, but was increased due to strong investor demand.
The chart below, which like the one above was taken from ANZ's Credit Focus, shows supranational spreads to NZ Government Stock widened significantly in early January as NZ government bonds outperformed other fixed income classes including Kauris.
"The spread widening was in large part due to NZGS yields moving into expensive territory as the market struggled to digest significant offshore buy-flow. It also provided investors with a window of opportunity to switch into AAA-rated supranationals, although there was also significant demand from yield-hungry real-money investors," says Lucas.
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The NZD proceeds will be cross currency basis swapped with USD raised under a private borrowing arrangement undertaken by a local NZ bank.
The swapped NZD will be lent by the Kiwi bank to those unsuspecting pay fixed swap borrowers if the lender can get it's way, as there surely is a demand to pay NZ$ fixed to the supranational NZD borrower under the terms of the swap agreement.
Farmers have in the past been the target of mortgages tied to fixed payment swap regimes - but since term interest rates are lower than past bank attempts to unload the fixed paying liability onto the not so well educated, any potential damage should be limited.
But if you believe this pundit, further deflationary moves in interest rates will be realised.
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