Budget 2023: NZ markets may struggle with more bonds

New Zealand Government bond yields spiked higher after the Treasury outlined a bond tender programme at the top end of expectations, which strategists said the market may struggle to digest.

The Treasury increased its forecast bond tender programme to $34 billion, up from a December fiscal update forecast of $30b.

The forecast programmes for 2024/25, 2025/26, and 2026/27 have all been increased, by $2b, $10b and $4b respectively.

Short-term borrowings (Treasury bills) and Euro-commercial paper (ECP) at the end of 2022/23 are forecast to be $4.5b.

At the end of each of the remaining fiscal years, short-term borrowings are forecast to be $9b.

In total, the programme has increased from the half-year update by $20b to $148b over the five-year forecast period to 2027.

ANZ market strategist David Croy said markets were struggling with the “raw size” of forecast issuance.

“It’s a significant increase in the amount of bonds to be issued over the coming fiscal years, and that’s even with expansion of the Treasury Bill and ECP programme for short-term funding,” Croy said.

“Those numbers beat all expectations and so the market is having some real trouble digesting the news and bond yields are up significantly,” he said.

Longer dated bonds were hard hit, with 10 years rising by 11.5 basis points to 4.31 per cent.

In bonds, prices move inversely to yields.

“The market is on edge here,” Croy said.

“It’s still trying to find a level and it might take a couple of days,” he said.

“The market is certainly going to have some digestion issues here.”

ANZ said the Treasury’s updated economic forecasts were “rosy”, and therefore represented a risk that NZ Debt Management would need to issue even more bonds than signaled, and a risk that key fiscal indicators improve more slowly than presented.

“The increase in bond issuance was double our central expectation, and there remain upside risks to this,” the bank said.

Westpac senior markets strategist Imre Speizer said the market’s reaction to the higher issuance was developing.

“In interest rates, it’s developing - up a few basis points - but it’s still in motion,” he said.

The New Zealand dollar gained ground, trading at US62.6c from US62.56c.

Mark Riggall, portfolio manager at Milford Asset Management, said that while it was a significant increase in the bond programme, the bonds would be absorbed.

“At the moment there is good demand for global bonds, but when they come to issue these bonds in the years to come, then this could change quite dramatically,” he said.

“Lots of countries around the world are requiring private investors to buy their debt because central banks are no longer doing quantitative easing,” he said, adding higher bond yields were likely in the years to come.

Riggall said the Treasury’s forecast that New Zealand would not now fall into recession was overly optimistic.

“I think its straining at the leash of credibility in terms of avoiding recession, and on reaching a surplus in 2026,” he said.