![](/sites/default/files/styles/full_width/public/feature_images/forsyth-barr-brand_1.gif?itok=jzoh6DdW)
Content supplied by Forsyth Barr
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.
---------------------------------------------------------------------------------------------------
Disclosures and Disclaimers:
Disclosure: The comments in this publication are for general information purposes only. This publication is not intended to constitute investment advice under the Securities Markets Act 1988. If you wish to receive specific investment advice, please contact your Investment Advisor. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) may own or have an interest in securities or other products referred to in this publication, and may be directors or officers of, or provide investment banking services to, the issuer of those securities or products, and may receive fees for acting in any such capacity in relation to that issuer. Further, they may buy or sell securities as principal or agent, and as such may undertake transactions that are not consistent with any recommendations contained in this publication. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) confirms no inducement has been accepted from the researched/recommended entity, whether pecuniary or otherwise, in connection with making any recommendation contained in this publication or on our website.
Analyst Disclosure Statement: In preparing this publication the analyst(s) may or may not have a threshold interest in the securities mentioned in this publication. A threshold interest is defined as being a holder of more than $50,000 or 1% of the securities on issue, whichever is the lesser. In preparing this publication non-financial assistance may have been provided by the entity being researched. A disclosure statement is available on request and is free of charge.
Disclaimer: This publication has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. However, that information has not been independently verified or investigated by Forsyth Barr Limited. Accordingly, Forsyth Barr Limited: (a) does not make any representation or warranty (express or implied) that the information is accurate, complete or current; and (b) excludes and disclaims (to the maximum extent permitted by law) any liability for any loss which may be incurred by any person as a result of that information being inaccurate or incomplete in any way or for any reason. The information, analyses and recommendations contained in this publication are confidential to the intended recipients and are statements of opinion only. They have been prepared for general information purposes and whilst every care has been taken in their preparation, no warranty or representation is given (express or implied) as to their accuracy or completeness. Nothing in this publication should be construed as a solicitation to buy or sell any security or other product, or to engage in or refrain from doing so or engaging in any other transaction. This publication should not be used as a substitute for specific advice. This publication is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs, and therefore prior to acting on any information, analysis or recommendation contained in this publication, you should seek advice from your usual Investment Advisor. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) will not be liable for any loss whatsoever suffered by any person relying upon any such information, analysis or recommendation. This publication is not intended to be distributed or made available to any person in any jurisdiction where doing so would constitute a breach of any applicable laws or regulations.
2 Comments
I just love the 'head-in-the-sand' approach to the two housing bubbles, Auckland and Christchurch by the Reserve Bank Governor. It is high time he got out of his wellington Office, attended some Auckland auctions, surveyed Christchurch's ruins and got a first hand feel for what is really going on. Auckland's bubble is primarily the result of Asian 'investors' buying up central Auckland properties as boltholes. Attend any central city auction and you will see who is buying, and all with foreign money, very little comes from NZ banks - ask bankers - they will tell you. The Christchurch bubble was caused by an earthquake decimating stock - no brainer to even the lowest IQ. Making it harder for young Kiwis to start at the lower rungs on the ladder will achieve nothing, other than to make it even easier for foreigners to buy more. Just how clever is this man we have in charge of our Reserve Bank? We should be very worried. Even Keys seems incapable of giving Wheeler a nudge in the right direction.
The whole inflation targeting paradigm should be revisited... I agree with Hayek..
just using the CPI.... is myopic. The whole economy is Opaque.. ie. everything affects everything.... the share mkt does not exist in isolation....neither does Real Estate.
http://www.cato.org/publications/commentary/great-18year-real-estate-cycle
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.