Tenor and liquidity
The New Zealand market saw a notable lengthening of issuance tenor in 2020, in particular in the high-grade sector. This development was accompanied by larger long-end turnover, though the demand sweet spot has dialled back somewhat in recent times.
JOHN There is not wide domestic demand when you get to the 30-year part of the curve. We had strong support from select domestic investors in our transaction, complemented with good offshore interest.
It seems the sweet spot at the moment is at the 5-7 year point of the curve, where there is a lot of liquidity. Bank liquidity books also have a lot of money to put to work, and their shorter-tenor demand seems to be the other sweet spot. Our view is that domestic investors are not chasing yield and do not look to go too far out the curve.
DIREEN Auckland Council’s deal was very successful and a lot of questions were asked of us in its wake. What we are hearing is a small sample, but discussions with investors suggest demand has if anything shortened up a little. We want to set points on the curve that we can subsequently tender into. If conditions are there for issuing at 10 years or extending the curve a bit, from our longest-dated nominal bond of 15 years, it could appeal to us.
We issued an inflation-indexed bond in April 2020 and we remain committed to developing this format. But it will depend to some extent on market conditions and the demand for nominal versus inflation. As I say, if we have an opportunity to set more points on the curve to give us better options at tender time we will look to take it.
I have to say well done to the RBNZ and the trading desks at the banks, which have provided liquidity and turnover all through the past year. Markets were dislocated in March but since then we have not seen any signs in the market that would concern us.
MARTIN Our tender outcomes over the last few months suggest demand has moved a little bit back to the short-to-mid curve. The volume of each bond we offer in our monthly tender schedule reflects this.
A less cyclical, and more structural, view can be seen in our syndication data. When we issue shorter-dated bonds there has been more domestic demand, and when we issue at the longer end of the curve there is greater offshore participation.
Over many years we have had a strategy of increasing the weighted-average maturity of our portfolio. It is just less than eight years at the moment.
We are encouraged by the participation in our 2041 syndication last year. It was not really extending the curve but reinstating the 20-year point, which had dropped away. We remain open to the possibility of longer-dated issuance.
MARTIN What we were picking up in the syndication data was less about a rates view and more about the fact that the domestic cohort contains a significant bank balance-sheet presence. These investors tend to have shorter-dated mandates.
BUTCHER A key factor in 2020 was the increasing role played by bank balance sheets. We certainly benefited from this – they all got increased limits for us and were also able to move further along the curve. We noticed that five-year tenor, which used to be a line in the sand, shifted out a few years. I think this was related to the steepness of the curve as well.
We also saw a lot more activity from domestic institutional investors over 2020. They bought a lot of our 2029 and 2033 bonds, though we have not seen as much volume in the 2037 line.
There has been strong interest from offshore and domestic institutional investors in long-term debt, but we are not likely to go beyond 16 years. This is because our council borrowers tend to be fixated on not borrowing beyond 10 years, so the amount of issuance we can do beyond that tenor point is restricted.
BUTCHER Increased issuance and greater outstanding volume should in theory lead to more secondary turnover – and we have certainly seen this in practice.
We saw a significant increase in turnover comparing 2020 to the year prior. January was a big month in our bonds, as were August, April and May – they were our record secondary turnover months. In January, there were significant redemptions of Kauri and covered bonds in the domestic market as well as a movement in yield.
There has been quite good depth to the market over the last six months and turnover has not been concentrated. We have seen turnover across the curve, not just focused in either the long or short end. I have to say well done to the Reserve Bank of New Zealand and the trading desks at the banks, which have provided liquidity and turnover all through the past year. Markets were dislocated in March but since then we have not seen any signs in the market that would concern us.
There has also been a substantial increase in long-end interest over the past couple of months, which has generated a lot of secondary-market activity. This has also been well supported by the banks.
