by Craig Simpson
We reported details of the new issue 2030 inflation indexed bonds yesterday - and today the New Zealand Debt Management Office (NZDMO) confirmed their syndicate of three selected institutions had successfully sold $2.5 billion worth of of 20 September 2030 inflation-indexed bonds to investors.
Initially the NZDMO indicated between $1 billion and $2 billion worth of bonds would be up for tender, however they received over $3.6 billion in offers based off an indicative pricing range of between 27 and 33 basis points over the September 2025 bonds.
Westpac had expected strong demand for the new bonds and cited the following as factors which would attract investors: real yields are well above comparable issues in Australia, US and UK; a recent Australian syndicated issues attracted demand above expectations; the inflation linked NZ govt bonds will be included in the Barclays World Government Inflation-Linked Index following a December rejig of the constituents; and since July's offering of 2025's tender performance has improved.
The bonds, which carry an interest rate (coupon) of 3.0%, were issued at a spread of 27 basis points over the existing 20 September 2025 inflation-indexed bonds and carry a current yield to maturity of 2.97%.
The success of this issue means the New Zealand Government inflation-indexed bond tender scheduled for 17 October 2013 will not be held.
The next tender of $200 million worth of 2025 inflation indexed bonds is set down for November 7.
Further issuance of the new 2030 inflation-indexed bond will not occur prior to January 2014.
8 Comments
New Zealand Debt Management Office (NZDMO) confirmed their syndicate of three selected institutions had successfully sold $2.5 billion worth of of 20 September 2030 inflation-indexed bonds to investors.
Initially the NZDMO indicated between $1 billion and $2 billion worth of bonds would be up for tender, however they received over $3.6 billion in offers based off an indicative pricing range of between 27 and 33 basis points over the September 2025 bonds.
What on earth do they need the money for?
The Government reported a NZ$4.4 billion budget deficit for the year to June 30, 2013, which was down from the NZ$9.2 billion reported in the 2011/12 year and below both the NZ$6.3 billion forecast in the May 2013 budget and the NZ$7.9 billion originally forecast last year. Read more
As of 13th September 2013 the RBNZ reported a local NZ Government liability (ie deposit) @ NZD 2.873 billion.
Adding the new inflation indexed bond proceeds @~ NZD 2.5 billion to the existing government deposit at the RBNZ creates a lot of extra money the banks will be forced to lend in the NZ market after the RBNZ has currency swapped it for USD.
What's more the proceeds from the Meridian float are not too far away from being realised.
Is this a government ploy to subvert the RBNZ's LVR restrictions or something else? - meanwhile the taxpayers are servicing the interest cost of this apparently unneeded funding.
Craigs earlier article suggested these index bonds can only be purchased/traded in multiples of $1 million. If correct this is a shame: many asset allocation advisory services (e.g Morningstar) set targets for Conservative/Moderative risk portfolios at CPI + 1.50% to 2.50%.
Yet here is an opportunity to buy Government issued inflation indexed bonds at CPI +3% with no credit risk, no inflation risk and no fees.
Therefore, why would an investor go to the trouble - and cost - of setting up a "Diversified" portfolio to achieve an outcome which can be reached with much more certainty with this simple security ?
PLJ
The issue was minimum and subsequent multiples of $1 mln and open to NZ investors. The question I have is where did $3.6 billion come from.
The benchmark of CPI +150 - 250 bps in Morningstar's asset allocation is low when you consider the current inflation is running at 0.7% as at last quarters reading and I see there being merit in having a diversified portfolio as you can easily achieve this benchmark without taking excess risk.
Craig
But Craig, why take any risk at all (via a Diversified portfolio) if you can achieve Morningstar's target (and more) by simply buying the indexed bond ?. No credit risk; no inflation risk; no fees; no hassles .............
You say the minimum bid in this issue was $1 million. But are they tradeable in smaller denominations on the secondary market ?
Hi PLJ this is taken from the NZDMO Q&A sheet
Q: What are the denominations of sale?
For primary issuance, the minimum denomination is NZ$1 million. Increments are NZ$1
million also.
Subsequently, the bonds can be sold in minimum parcels and increments of NZ$1,000.
A purchaser of the primary issue (including the syndicate) will be able to sell IIBs to you
in these increments.
I suggest your financial adviser, broker or Private Banker (via their in-house treasury team) will be able to provide you access to these bonds in the denomination desired so long as it is in multiples of $1,000
PLJs observation is essentially correct.
If you can achieve inflation protected real returns of 2.5%-3.0% (and that is the return what you want) simply by investing in inflation linked bonds (ILBs), there is little merit in investing in equities etc. This is particularly the case if your time horizon matches that of the bonds in question. If however your investment time horizon is shorter than than the duration of your holding in ILBs, you are exposed to interest rate volatility i.e. rates rising , however when compared to equities risk, this is low. Unfortunately the lack of understanding of ILBs and fixed income generally and the lack of fees generated by advisors from this course of action and also to be fair, investor greed (always looking for return, ignoring risk) means that PLJs observation falls on deaf ears.
It is difficult to argue in anycase that ILBs should not form a core part of a diversified portfolio.
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.