If the RBNZ's recently introduced loan-to-value restrictions fail to slow house prices, the Official Cash Rate (OCR) will rise more aggressively

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The following is a summary of the key events impacting fixed income markets over the past week.

As expected the focus of the market remained firmly on the US and its ‘issues’ surrounding the shutdown and on-going stalemate. Locally we had several announcements from the Reserve Bank of New Zealand around loan-to-value ratios and the non-bank sector.

If LVR restrictions don’t work, interest rates will rise

The RBNZ stated that if the recently introduced loan-to-value restrictions fail to slow rising house prices then it will be forced to raise the Official Cash Rate (OCR) more aggressively. Currently, the RBNZ are forecasting to raise the OCR by 2.0% from 2014 through to 2016, however larger increases may be required. The market is likely to get a clearer picture when the RBNZ releases its Monetary Policy Statement in December as it will then have accumulated at least two months of data on the success of the LVR restrictions.

According to the overnight index swap market the next 25bp rise in the OCR is expected at the 24 April 2014 RBNZ meeting, however there remains around a 65% chance of a rise a month earlier at the 13 March meeting.

Non-bank sector in the headlights again

In light of the new LVR restrictions it is no surprise that the RBNZ is looking closely at the regulation and monitoring of the non-bank deposit taking sector (NBDT). Due to the banks being restricted under the LVR regime, there is a possibility that the NBDT sector could re-enter the market to pick up the slack.

The RBNZ are seeking greater powers over finance companies and credit unions. The RBNZ are also proposing that the central bank can take control during times of crisis along with greater penalties for breaches. The review is currently in Parliament.

US remains ‘closed’

The one major casualty of the partial US shutdown was the non-release of the crucial non-farm payrolls data that was due out on Friday night. With the unemployment rate so closely aligned with the Fed’s monetary policy, the data is closely analysed by global markets.

As yet, the markets have not overreacted to the shutdown with many still believing a solution will be found with Republican House Speaker, John Boehner refusing to raise the debt ceiling until a serious conversation about what is driving the debt is undertaken.

US treasuries were +3.5bp higher over the course of the week to finish at 2.645% with New Zealand 10 year government bonds +6.7bp higher over the week.

Central bank meetings

Last week saw the European Central Bank (ECB) and the Reserve Bank of Australia (RBA) hold policy meetings. The ECB appear to have their hand on the gun ready to fire with the real possibility of another long-term refinancing operation, if required. While the economic recovery in Europe is underway it can be described as fragile at best.

The RBA look like it could be done with its easing bias with those still forecasting further rate cuts pushing the timetable out to 2014. While the economy is not back to its super growth cycle of recent years, there are many indicators pointing to the RBA on hold for the time being.

A Quiet September, will October be any different? 

The month of September saw new issuance actually outshine maturities in the ANZ Investment Grade Bond Index. Westpac issued NZ$800m as opposed to the maturity NZ$150m of Merrill Lynch bonds and NZ$60m of Kiwibank tier two securities.

Overall it was a reasonably unspectacular month in the local corporate bond market wit the yield on ANZ Investment Grade Bond Index rising +1bp. The ‘no-change’ scenario was also reflected in the steepness of the yield curve which was -2bp flatter over the month of September.

The make-up of the Index continues to be dominated by financials (banks). However, the growth of the Local Government Funding Agency will continue to be a feature of the Index as more councils join (the LGFA) and the borrowing appetite from Local Authorities continues to increase.  

LGFA spreads widened a touch over the month and just like interest rates in general, May 2013 proved to be the low/turning point. We would expect the demand for LGFA bonds the increase when offshore investors gain some further comfort from increased liquidity. The LGFA can appeal to some local fund managers as they can utilise the wider spreads on LGFA bonds as an alternative to holding NZGB’s. There is around a further NZ$775m of bonds maturing in the remainder of 2013 and it would be useful to the market, and in particular the retail bond market that more corporates look to not only issue bonds but also to list the issue on the NZDX.

The number of bonds now quoted on the NZDX is just 86 compared to 108 just two years ago. While the equity markets may be enjoying a stellar listing year, it is hoped the NZX is putting just as much effort into securing debt listings.

Corporate / Credit news

ANZ announced it would redeem its US$750m Trust Securities which were issued in November 2003. The securities qualified for treatment as Additional Tier 1 Capital under APRA’s Basel III transitional rules up until the first call date The redemption of the Trust Securities reduces ANZ’s pro-forma Tier 1 capital ratio as at 30 June 2013 from 9.5% to approximately 9.3%. ANZ’s Common Equity Tier 1 Capital ratio is unaffected by the redemption.

The Debt Management Office (DMO) sold NZ$200m of 2025 inflation-indexed government bonds which drew total bids of NZ$251m.

The Debt Management Office (DMO) also announced a syndicate to lead the issuance of its new inflation-indexed bond. The new bond will mature in 2030 with the DMO expecting to issue around NZ$1-2bn on its debut. 

Nufarm (NUF.ASX) had its credit rating outlook lowered from stable to negative by S&P post its poor FY13 financial results. S&P affirmed its BB credit rating.

The NZX released its monthly operating metrics for September which illustrated the continued decline of debt securities listed on the NZDX, down another -14% versus the pcp to 86. The total number of trades on the NZDX also fell -16% with the value of those trades falling -9.2%.

Origin Energy (ORG) has been busy in the markets raising US$800m in five year unsecured notes with a coupon of 3.50%. This issue followed an earlier issue which saw €800m of eight year medium term notes issued at 3.50% on 30 September. Both deals have been swapped back into AUD and will be used to repay bank debt.

The government announced the long awaited restructure of Solid Energy. The restructure includes the issue of NZ$100m in non-voting redeemable preference shares – NZ$75m to key lenders in exchange for part of the debt owed to them and NZ$25m to the Crown in exchange for cash. Along with further restructuring it appears the medium term note holders remain largely unhindered except for some priority debt now likely to be placed above it.
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