NZDMO eyes inflation indexed bonds (Update 1)

By Gareth Vaughan The New Zealand Debt Management Office (NZDMO) plans to issue up to NZ$12.5 billion worth of bonds in the 2010-11 financial year, potentially including inflation indexed bonds for the first time since 1999. (Update includes Treasury's inflation forecast). The NZDMO said it was "actively considering" reintroducing inflation-indexed bonds. The Crown hasn't issued consumer price index (CPI) linked bonds since 1999 although one remains on issue. It has a face value of NZ$1.171 billion and matures in February 2016. Andrew Turner, NZDMO's head of portfolio management, told interest.co.nz the NZDMO needed to assess demand for CPI linked bonds which it thought might be a way to provide cost effective funding for the Government. There was growing interest in the product internationally and Australia had reintroduced indexed debt last year.

"The fact there's more interest in the product globally means we are keen to see  if there is demand for New Zealand indexed debt," Turner said. "The work the Capital Markets Taskforce did (also) highlighted the merits of inflation indexed debt." The NZDMO's move comes with Treasury forecasting a rise in inflation to 5.9% in 2011. CPI for the year to March was 2%. The Reserve Bank is required to keep inflation between 1 and 3% on average over the medium term. A first issuance could come sometime between September and November although the timing would depend on what form the CPI linked debt was issued in, Turner said. Three potential forms of issuance were under consideration including via a tender, syndication or private placement. In an offer managed by Westpac Institutional Bank, Transpower this month raised NZ$100 million from institutional investors in the country's first issue of CPI linked bonds by a company. Westpac is now eying retail investors for future CPI linked bond issues. Transpower's 10-year bonds will pay interest of 4.115% on the principal investment on each quarterly payment date with the principal ratcheting up by reference to CPI, meaning the cash interest amount payable is also increased. At NZ$12.5 billion, the NZDMO's total issuance for the 2010-11 year is the same as in the current year but NZ$2 billion lower than announced last December due to improvements in the fiscal outlook. The Government's 2010 Budget also includes forecast bond programmes of NZ$10.5 billion in 2011-12, NZ$10 billion in 2012-13 and NZ$6 billion in 2013-14. This was first published in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.