Local debt markets face a litmus test this week in the aftermath of Cyclone Gabrielle as the Treasury seeks to raise billions of dollars through a syndicated bond offer.
The Treasury expects to issue at
The Government is raising $3 billion through a syndicated bond offer this week.
Local debt markets face a litmus test this week in the aftermath of Cyclone Gabrielle as the Treasury seeks to raise billions of dollars through a syndicated bond offer.
The Treasury expects to issue at least $3 billion of a new May 2030 bond this week, with the transaction to be capped at $5b.
Results of the offer may provide a gauge of demand ahead of what is expected to be more pressure on the public purse to deal with extensive cyclone damage throughout the North Island.
The more regular bond tenders normally raise around $400 million.
Syndicated bond issues, where a panel of banks are invited to offer bids on far larger offerings, have tended to be held twice a year.
Results of this week’s offer will be keenly watched by the market, Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said.
“All of a sudden, the market will have something quite tangible to possibly re-price on,” Pepper said.
“The pressure, as governments ask for more funding, will go on the market to fund them by a larger amount, and so yields will come under upward pressure,” he said.
Pepper said yields on longer-dated bonds had edged up, relative to swap rates, and relative to US and Australian yields.
“So that is telling you that there is a little bit more concern about that funding need,” he said.
Before Gabrielle, the market was already facing an enlarged borrowing requirement.
The Government’s fiscal update, issued in December, raised its borrowing plan for the current fiscal year (to June 30) by $3b from an earlier forecast, to $28b.
The December update also outlined plans to raise $30 billion apiece in the 2023/24 and 2024/25 fiscal years, before easing back $20b in 2025/26.
Pepper said the government had been giving markets the benefit of the doubt in terms of the likely requirement arising from the floods.
By doing so, he said it had successfully avoided the “Liz Truss dynamic” when financial markets tanked in response to then British prime minister’s fiscal plan that led to her resignation after 44 days in the job.
Pepper said the best option would be to put the likely extra funding into the latter years – from the middle of 2025 to 2006 and 2027.
“The market could digest that far better than the reverse.”
Finance Minister Grant Robertson has talked about the cyclone repair bill as being in the same league as the Christchurch earthquakes - around $13b, including insurance.
Kiwibank chief economist Jarrod Kerr said this week’s syndicated offer would be important.
“International investors in particular will be aware that the New Zealand government has a mammoth task in front of it in terms of contributing to the rebuild,” Kerr said.
Kerr and other analysts stressed that New Zealand’s credit rating is high, relative to many other countries and that its levels of debt are lower than most.
S&P Global Ratings has an AA Plus foreign currency credit rating on New Zealand sovereign debt, with a stable outlook.
“We do have issues ahead of like most countries - aging populations, and creaking infrastructure so yes, it is an important test this week,” Kerr said.
“But when we put it into context, we do have very low levels of debt to start with.
“Going on everything that happened in the last month, there is clearly an uphill battle ahead around significant costs that will be incurred by the Government and the councils, so it is an important litmus test,” he said.
Much rides on the Government’s next budget, due on May 18.
“In the May budget we are going to see exactly how the government plans to pay for all of this,” he said.
“There is going to have to be an increase in debt.
“They may consider a levy of description, which could potentially offset some of that, or re-divert funds away from some other areas, which would be unpopular and hard to do.”
BNZ interest rate strategist Jason Wong expects this week’s offer to be “business as usual” for the bond market.
“The Government is always going to be in the market issuing bonds and syndications are always going to come at some point,” Wong said.
And the whole rebuild process is going to be over many, many years.
“I think the market is thinking that the fiscal accounts are obviously going to be in worse shape than they were before the cyclone, but New Zealand’s accounts are still in pretty good shape compared to other countries,” Wong said.
“There is always a price and they should not have too much trouble.”
Meanwhile, participants are not placing much importance on two recently-held bond tenders that were undersubscribed.
In February, an offer of $200m in April 2027 bonds attracted just $188m in bids.
And in December, an offer of $200m in April 2033 bonds attracted $189m in bids – the first undersubscribed tender since 2012.
The NZ sharemarket had another strong afternoon.