Few takers for eurokiwi bonds

Global investors are unlikely to return to NZ unless bond yields turn dramatically, Yoke Har Lee reports.

In sharp contrast to last year, global bond investors are disenchanted with New Zealand-dollar assets, indicated by the dearth of eurokiwi bond issues and the striking fall in non-resident holdings of Kiwi bonds.

The fall comes as the yield gap between New Zealand bonds and United States bonds narrows, eroding New Zealand's attraction.

Last year, $8.25 billion of eurokiwi bonds were raised. By contrast, this year has seen only $1.6 billion raised - mostly in January and February - with half the year nearly over.

A total of $18 billion of eurokiwi bonds has been issued since 1996. Eurokiwis refer to New Zealand dollar bonds issued outside the country.

Non-resident bond holding as a percentage of total Government securities is 50.5 per cent, its lowest level since the 47 per cent seen in April 1996. At the peak, non-residents held some 70 per cent of New Zealand Government bonds, dealers said.

New Zealand is unlikely to see any early return of global bond investors. The trend will turn only if Kiwi bond yields, which have been narrowing over the US and Canadian yields, change substantially.

Stuart Marshall, economist at investment bank Bancorp New Zealand, said global bonds had fallen out of favour with fears of rising US interest rates and New Zealand bonds were no different.

At its peak last year, the spread between 10-year New Zealand and US Government bonds was over 140 basis points. The spread refers to the difference in yield between two bonds.

Ten-year kiwi bond spreads were as high as 200 points over US bonds of the same maturity at their peak in 1996. Now spreads ranged between 50 and 70 points.

"The yield advantage of buying a New Zealand-dollar product over Aussie and US product has diminished substantially," an Australian dealer said. "Consequently, we have seen diminished international interest for New Zealand-dollar products over this year than the last couple of years."

And the trend is unlikely to turn soon. "It will only happen if you see interest rates turning dramatically, or the substantial yield differential reappear. Also, offshore investors have got to be convinced there is going to be very good performance in New Zealand-dollar based products," the dealer said.

A fixed-interest rate manager of an asset management company said that for the first time in nine years the US appears threatened by inflationary fears.

Being correlated to the US as a dollar-bloc market, New Zealand bonds would be sold off if fixed-income investors decided to offload their bond holdings.

But Mr Marshall said that when investors were done with the sell-off, New Zealand might benefit.

"The world, in my view, still looks upon New Zealand favourably. Global investors will be looking at the US inflation threat and comparing the two," he said. "They are likely to say there is no reason why so much risk premium be attached to New Zealand."