NZ bond yields surged after today's fiscal update. Photo / NZME
New Zealand 10-year bonds went up after the Government unveiled a bigger-than-expected bond tender programme for 2024/25 and beyond.
The forecast 2024/25 Government bond programme has been increased to $40 billion, $2b higher than that published in the May budget.
The forecast bond programmes for 2025/26, 2026/27, and 2027/28 have also been revised higher, by $4b, $6b and $8b respectively.
The 2028/29 year has been added to the forecast period, with a $22b bond programme.
The Treasury has downgraded its economic and fiscal forecasts to the point where the forecast return to the operating (Obegal) surplus and residual cash surplus is not achieved over the forecast horizon.
“That’s much weaker than we anticipated,” ANZ economists said.
The bank said the increased issuance guidance was primarily due to the downgrade to the economic and tax outlook, with a little more capital spending added.
New Zealand 10-year bond yields rose to 4.52% in response to the update, from 4.44% at the close on Monday.
The 10-year bond - unusually - is trading about 45 basis points over the equivalent swap rate.
“The market is telling us that there is so much bond supply coming on because the fiscal position is not great,” BNZ senior market strategist Jason Wong said.
“Every week they [NZ Debt Management] are tendering $50 million and on top of that there are syndications of $3-4b through the year.
“The market has reacted to a bad fiscal position, so you are going to see high yields as a result.”
In a commentary, BNZ said that based on the new forecasts, New Zealand will have been in deficit for a whole decade.
“The last time we experienced something like this was the awful period in New Zealand’s economic history between 1979 and 1993,” the bank said.
BNZ said the path back to surplus will remain “very challenging”.
ASB senior economist Mark Smith said the gap between the 10-year swap rate and 10-year bonds had widened considerably, and had widened further after today’s release.
“What it is saying is that the market is getting a bit nervous about how much debt is being issued by the Government, and they are demanding more of a premium.
“In context, we are one of the better ones in terms of sovereign debt - our sovereign debt is comparably low - but the trajectory of late has not been good,” Smith said.
“In terms of the outlook, weaker GDP is part of the story and they have revised down their revenue down given that weaker GDP outlook.”
The New Zealand dollar fell after the fiscal update to around US$57.76c from around US58c just before its release.
“The market response seems entirely appropriate as the rating agencies will not be overjoyed by these developments, and there are concerns about market indigestion given the quantum of issuance that will occur over the next few years,” BNZ said.
Net bond issuance will climb to a peak of 5.3% of GDP in fiscal 2026.
“Since the early 1990s we have only seen issuance of this magnitude in times of crisis such as following the Christchurch earthquakes and the pandemic,” BNZ said.
The main reason for the debt blowout is the much higher than previously forecast fiscal deficits for the next four years.
“Worryingly, the deficit is on a rising trend. Moreover, the Obegal is expected to stay in deficit through the forecast period which now ends in June 2029,” it said.
The May Budget had assumed a surplus in the June year, 2028.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.