New Zealand is approaching a forecast period of strong budget performance, and by maintaining bond supply the NZDMO hopes to support confidence in an actively traded market.

As part of its 2017/18 budget, delivered on 25 May, the New Zealand government announced a commitment to maintain levels of New Zealand government bonds (NZGBs) on issue at no less than 20 per cent of GDP.

The work behind this initiative was led by the NZDMO and “required buy-in from our colleagues in the New Zealand Treasury before providing this advice to the government”, says Murray Jones, head of portfolio management at the NZDMO in Wellington.

The fact the minimum-supply threshold is a proportion of GDP means it will be a moving target rather than a fixed volume. However, budget projections suggest that as net supply turns strongly negative at the start of the next decade the volume of NZGBs outstanding should remain greater than NZ$65 billion (US$47.2 billion) (see table below).

Forecast NZGB issuance and outstandings

Source: New Zealand Debt Management Office 25 May 2017

“Although the forecasts have tended to show NZGBs staying around current levels over a five-year period, the projections beyond this showed quite rapid declines in NZGBs on issue. We wanted to front-foot this before it became an issue,” Jones reveals.

As a result, he adds, the NZDMO has been through an internal process of working out what it believes a viable minimum issuance volume would look like and what it would be trying to achieve by having one.

“The exercise is really about ensuring sustainability of the market – that is, maintaining a highly engaged and diversified investor base and active intermediaries irrespective of the Crown’s funding requirements,” Jones continues. “A sustainable market also helps provide reliable pricing benchmarks for other issuers and less volatile bond programmes over time.”

The question of NZGB supply was also already on investors’ radars. Jones confirms: “A lot of the questions we were getting from investors were around what the focus on paying down net debt would mean for NZGB programmes and levels of outstandings.”

In fact, Jones reveals that the NZDMO has been looking at the minimum-supply concept for at least the past 18 months, though the amount of time it has devoted to it picked up in the past six months.

“We were very conscious that we have done a lot of work increasing the supply of bonds on issue, extending the duration of the curve, developing our investor base and working with our intermediaries to get them as engaged and active as possible,” Jones comments. “We believe the announcement of this commitment will give intermediaries and investors confidence that the supply of bonds will remain above a certain level – that will grow in line with the economy.”