The substitution effect
Some high-grade issuers hope to benefit from the projected reduction in the New Zealand Debt Management (NZDMO)’s issuance task in the coming years.
BUTCHER This probably won’t surprise anyone, but overall I think it’s a positive thing for the New Zealand Local Government Funding Agency (LGFA). Over the past six months the LGFA has experienced good demand and our paper has become expensive relative to supranational, sovereign and agency (SSA) Kauris, which haven’t been issuing in large volume.
More recently, LGFA bonds have cheapened up as the SSAs have started issuing and the market has turned its attention to the forthcoming NZDMO 2029 maturity. This is substitution playing out, which I think will continue to happen over time. There are some central-bank and mutual-fund investors that don’t buy LGFA bonds because we aren’t sovereign, triple-A rated or sufficiently large. They may never switch, but there are a lot of investors out there that will look at both the LGFA and SSA Kauris.
One would expect that if the NZDMO issues less, swap spreads will widen and this will be positive for other issuers. there is the risk, though, that global investors pull back from noncore dollars to some extent.
HELLERUP One would expect that if the NZDMO issues less, swap spreads will widen and this will be positive for other issuers. There is the risk, though, that global investors pull back from noncore dollars to some extent.
We recently saw Norges Bank announce that its whole fixed-income portfolio will be switched to US dollars, euros and sterling – though I don’t know whether or not this relates to global government-bond markets getting smaller. On balance, I’d say wider swap spreads should be positive for other issuers.
CHAO Our most recent Kauri saw 60 per cent domestic distribution, and it’s certainly the case that global demand for New Zealand dollars is somewhat muted at present. I think it will help us, ultimately, if the government is issuing less.
FAVILLE The last time there was a really fertile period for Kauri issuance was around an NZDMO maturity, and we have the next one coming in December – as well as the first liquid LGFA maturity. Investors haven’t run for the exits, but offshore participation in the Kauri market this year has certainly been lacklustre. It will be interesting to see if anything happens around this next sovereign maturity.
