By Craig Simpson
An overwhelming number of economists and market participants have been forced to hold their breath for another month as the US Fed chose not to pull the tapering trigger.
Commentary over the past week suggests the pro-tapering brigade may be waiting a bit longer to get their wish. The US Federal shutdown which took effect on October 1 is likely to delay the Fed's decision to pullback from their bond buying program.
The Fed indicated the following were largely behind their decision: US fiscal outlook was uncertain; there was ongoing, largely unnoticed, regulation driven credit deflation within the banking system; the weak underlying labour market and the general deflationary global trade environment.
During September the market sentiment remained reasonably upbeat and investors climbed back into US Treasuries. 10-year bond yields finished the month 17bps lower around 2.6%, a full 40bps below the mid-month 3% peaks.
The US policy makers were unable to come to agreement on increasing the debt ceiling and preparation was underway for a general shutdown of Federal government agencies and other non-essential services. This will be the first time in 17 years the Federal government is shut down and the 22nd time since the early 1970's this event has occurred.
In New Zealand, local government bond tenders attracted lackluster support in September however commentators are expecting there will be solid demand for the new tranches of inflation-linked debt which are confirmed for inclusion in global inflation indices from year-end.
Swap rates in the middle of the curve increased between seven to eight basis points while the short and long-end hardly moved. Similarly corporate bond yields remain range bound and close to five year lows. ANZ report issuance conditions remain favourable, with pent-up demand strong in September amid a dearth of recent issuance.
ANZ's latest Credit Focus paper notes the composition of ANZ Corporate Bond Indices shows a shift in exposure away from financials and towards local authority debt in recent years.
Demand for LGFA bonds remains and credit margins have widened, although demand for longer-duration credit is slowing as nominal bond yields rise.
TSB emerged as a bondholder in beleaguered SOE Solid Energy. "The bank notes the uncertainty on the future of Solid Energy, although at this time the holding is not considered to be impaired," TSB says. This is the same company which has just announced a $335.4 mln loss.
Central bank watch
All of the central banks who had rate announcements in September, and there was a number of them, chose to keep the status quo.
Our own RBNZ delivered what many describe as hawkish comments which pushed the NZ$ higher. Governor Wheeler says the RBNZ has increased its forecast track for interest rates by around 50 basis points. It also sees inflation pressures building from the Canterbury recovery and the Auckland house price surge.
The bank also estimated that the limits on high Loan to Value Ratio (LVR) lending it is imposing from October 1 were 'worth' around 30 basis points of interest rate increases. This implies the Reserve Bank would have increased its forecast track by around 80 basis points with a peak closer to 5% by early 2016 than the 4.7% currently forecast.
Housing boom a key credit concern
Moody's Investors Service has maintained its stable outlook on New Zealand's banking system, but says the risk of an asset bubble triggered by a lending boom remains a key credit concern.
Moody's assistant vice president and analyst Daniel Yu says the stable outlook over the next 12 to 18 months reflects Moody's expectation of continued improvements in New Zealand's economy, supported by post-earthquake reconstruction in Christchurch and low interest rates.
"The stable outlook is based on Moody's expectation that GDP will grow by an average of 2.2% this year and 2.6% next year," Yu says. "In addition, Moody's believes that whilst rising house prices and high household indebtedness reflect some domestic imbalances, they will not pose significant risks to the stable outlook in the coming 12-18 months."
Yu notes that stricter regulatory requirements have forced banks to reduce their dependence on wholesale funding markets, although at 32% of total funding, New Zealand big banks' exposure to wholesale funding remains a key sector weakness. Moody's estimates two-thirds of this wholesale funding comes from offshore. The 32% of total funding estimate is down from 37% as recently as April.
Market performance indicators
Global government and corporate bonds hedged back to NZ$ rose just under 1% for the month following the Fed decision not to taper back their QE program.
Cash and New Zealand bonds were marginally positive for the month with NZ corporate bonds returning just under 0.5%.
The table below outlines the returns over the past one, three and twelve months. Investment into global bonds which are fully hedged back to NZ$ have been the clear winner in recent times.
| Index | 1 mth | 3 mth | 12 mth | year to date |
| NZX NZ 90 Day Bank Bill | 0.21% | 0.66% | 2.67% | 1.99% |
| NZX NZ Government Stock | 0.08% | -1.20% | -2.10% | -2.49% |
| NZX Corporate A Grade | 0.45% | 0.31% | 3.04% | 1.29% |
| Barclays Global Agg Index Hedged to NZD | 0.97% | 1.41% | 2.81% | 1.29% |
| Citigroup WGBI Hedged to NZD | 0.87% | 1.32% | 3.21% | 1.75% |
| Citigroup WGBI Unhedged (NZD) | -5.29% | -4.60% | -4.85% | -3.86% |
Bond issues, tenders and offers
During September the following issues,tenders and offers were made:
- $300 mln NZ Government Stock maturing in April 2020
- $800 mln Westpac bond with a coupon of 5.545%
- $115 mln worth of LGFA bonds across 4 maturities (2015, 2017, 2019 & 2021)
Upcoming maturities through to the End of November 2013 are shown below:
- 8/10/2013 - BNZ, $50 mln with 3.84% coupon
- 15/10/2013 - Auckland Council $200 mln floating rate note
- 15/11/2013 - Dunedin City Treasury $40 mln with 7.07% coupon
- 15/11/2013 - Wellington Int'l Airport $100 mln with 7.50% coupon
- 18/11/2013 - ASB $170 mln with 5.52% coupon
- 28/11/2013 - Westpac $265 mln with 7.05% coupon
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