Treasury's Debt Management Office sees weak demand for short-term NZ government debt

A NZ$300 million government bill auction - for debt issuance with maturities of less than a year - saw weak demand for New Zealand government securities with Treasury's Debt Management Office only accepting NZ$250 million of bids from a total NZ$330 million of bids.

The NZDMO told interest.co.nz it was comfortable with the weak issuance, as demand for bills had fallen since the global financial crisis while demand for bonds - securities with maturities over a year - was rising.

The auction on Tuesday afternoon offered NZ$100 million in government bills for each tranche maturing on August 24, 2011 (84 days), November 30, 2011 (182 days), and May 30, 2012 (364 days).

The August 24 tranche only received one bid of NZ$50 million, which was accepted at a yield of 2.57%.

The November 30 tranche received six bids worth NZ$150 million, with four bids worth NZ$100 million accepted at a weighted average successful yield of 2.68%.

The May 30, 2012 tranche received six bids worth NZ$130 million, although only NZ$100 million was accepted at a weighted average yield of 2.92%.

The government is auctioning NZ$20 billion of debt in the current financial year, to cover a NZ$16.7 billion deficit before gains and losses, and to pre-fund some of next year's projected NZ$9.7 billion deficit.

NZDMO comfortable

Treasurer Philip Combes told interest.co.nz the NZDMO was comfortable with Tuesday's auction, as demand for government bills had been weakening since the global financial crisis, while demand for government bonds had been rising.

“We’ve had off and on [demand] for quite a few weeks now – less interest in our Treasury bills than, say, six months or a year ago. That seems to be little bit of a trend we’re experiencing,” Combes said.

“The really big lift in our Treasury bill issuance was particularly in the early stages of the [global financial] crisis. There was a big requirement for liquidity and, unlike our bonds, which have got quite a substantial offshore holding, the Treasury bills have been held much more by the local banks here,” he said.

“The difference between the two markets is there is a much higher New Zealand bank holding of our Treasury bills than there is of our bonds. So as they are more comfortable with the liquidity environment and so on, [they] probably have a little less reason to hold those bills,” Combes said.

“We certainly have seen, almost at the same time as our bond market has been experiencing very strong demand, we’ve certainly seen demand for our Treasury bills, on the other hand, weakening off in trend terms over the last few months.”

There was nothing to worry about unless both the bill and bond markets experienced the weakening in demand.

“From our point of view the only concern would be obviously if both markets were weak, whereas at this stage, to be honest, as a medium term preference we’re happy to have more bonds out there going forward," Combes said.

“If that means relatively more bonds, and relatively fewer Treasury bills, we’ve got no problem with that at all,” he said.

That scenario was fine from a government funding perspective.

“At this stage with Treasury bills, we’ve issued them for three months, six months and a year, so clearly it’s going to be a while before we see any significant reduction in our standings, even if bit-by-bit we’ll see some run-down. The way the recent tenders have been going, we’ll see outstandings come off a bit," Combes said.

“But we’ve still got quite a decent volume out there and then just over time I’d expect we’d gradually look to, at the margin, have more bonds out there and less bills,” he said.

“We’ll definitely respond [to the falling bill demand], we’ve already done a bit of that. In the heyday, in the early stages of the crisis, we were holding regular NZ$500 million tenders for bills, whereas this last one was NZ$300 million and we issued NZ$250 million.

“We’re back to between NZ$250-NZ$300 million, whereas there were successive tenders for quite a while at NZ$500 million 18 months to two years ago,” Combes said.

(Updates with NZDMO comments)