It is quiet out there - too quiet?

By Roger J Kerr

All quiet on the western-front as far as the short-term interest rate market is concerned in New Zealand.

Recent NZ economic data in the form of employment, housing, electronic retail spending and manufacturing PMI Index have all been pretty positive and point to the RBNZ having to progressively lift themselves (due to the hard economic facts) and their GDP growth/inflation forecasts over the remainder of this year.

Removing the 2.5% OCR monetary stimulus will in my view start to occur earlier than current RBNZ timing and moneymarket forward pricing.

This week’s budget should not upset the more active secondary market trading in our Government bonds. The increased new issuance over the last 12 months and the requirements of large overseas investors into the NZ Government bonds has lifted bond market trading volumes and liquidity levels this year. 

The offshore investor demand will remain strong; however it is likely to be stronger at a 0.7200 NZD/USD exchange rate than the current 0.7800 exchange rate.

While the financial markets are still giving the probability of a NZ sovereign debt credit rating downgrade from AAA a 50/50 chance, the likelihood of a downgrade has diminished in my view.

The bottom-line is that Standard & Poor’s are not really in a position to question the Treasury’s GDP growth forecasts over coming years that deliver the tax revenue into the Government. 

S&P will assess the risk of these GDP growth forecasts not being met; however they would have to see actual budget deficits significantly larger than forecast deficits to downgrade the credit rating on an impaired ability to service and repay the debt.

What might be more concerning for investors and borrowers in New Zealand is the prospect of S&P downgrading the credit ratings of the Australasian banks.

S&P issued a press statement about their own changes of criteria and methodology for rating the Aussie banks several months ago, but nothing has been announced since. Any credit rating downgrades for the banks would flow though into a higher cost of longer-term funds and thus be passed through to corporate borrowing customers of the banks.

These developments do suggest that any corporate borrower contemplating a RFP process to refinance or raise new bank debt would be well advised to do this sooner rather than later.

There continues to be a shortage of new corporate bond issues to meet the current investor demand.

The banks are very flush with reinsurance cash that has come into NZ that will not be paid out on insurance claims for several months. Commercial paper issuance margins have been pushed down due to this weight of funds trying to find a home.

There are rumours that HSBC bank are about to announce their first NZ retail bond issue to tap into this investor demand. The Genesis Energy 30-year subordinated Capital Bonds are apparently filling up well as small investors are attracted to the 8.50% yield without necessarily understanding the liquidity and credit risks of the security.