NZ bonds, dollar gain after Budget announcement

Photo / Martin Sykes

New Zealand government bonds rose and the kiwi dollar gained after Finance Minister Bill English released his Budget, showing reduced issuance of new debt and a quicker return to surpluses.

The yield on 10-year bonds fell about 5 basis points to 5.15 per cent, the lowest level since October last year, after the Budget was released in Wellington today. The New Zealand dollar climbed to 79.18 US cents from 78.94 cents immediately before the report as released.

The two-year swap rate rose about 3 basis points to 3.30 per cent.

"We knew this Budget was going to be an austere one to preserve our credit rating and it looks like we are making progress in that regard," said Grant Hassall, head for fixed interest at AMP Capital Investors in Wellington.

"Bond market supply is going to be low which will drive prices up and yields have already started to fall."

The government will slash its bonds sales to the equivalent of about $100 million a week over the next 12months from the $380 million-a-week pace in the current fiscal year ending June 30.

The Debt Management Office plans to sell $13.5 billion of bonds in 2012 financial year, down from a record $20 billion in the current year.

Rating agency Standard & Poor's announced immediately after the Budget was released that it was keeping the nation's sovereign credit rating at AA+ and maintaining the outlook at 'negative'.

S&P said New Zealand's external imbalance is still weighing on the nation's credit rating, though the New Zealand government has brought forward its forecast return to surplus by a year to 2015.

"Achieving the government's stated fiscal targets will be an important component of such an improvement," sovereign analyst Kyran Curry said.

"Public finances may need to be adjusted faster if New Zealand's real cross-border interbank funding costs rise."

New Zealand's operating deficit is forecast to peak out at $16.7 billion in the year ending June 30, melting away over the next three years before turning to a surplus of $1.3 billion in the June 2015 year.

Core Crown expenses are forecast to rise 5.9 per cent to $77.1 billion in the five years to 2015 while core revenue soars 34 per cent to $76.4 million, the Treasury projections show.