Local Government New Zealand's funding body is closely monitoring investment in its bonds as US Treasury yields increase, with concerns borrowing costs may rise if foreign investment demand drops off.
The Local Government Funding Agency (LGFA) is the second-largest issuer of debt securities in New Zealand behind central government. At LGNZ's quarterly media briefing in Wellington today, LGFA chief executive Mark Butcher said yield forecasts show government bond yields are expected to be lower than US Treasury yields for terms out to nine years. The yield on New Zealand's 10-year government bond was recently at 2.96 percent, up from 2.75 percent at the end of 2017, while US 10-year Treasuries are at 2.84 percent, having climbed from 2.41 percent.
LGFA expects offshore interest rates to keep increasing, while New Zealand's Reserve Bank has signalled it won't move for at least another year. Some 40.5 percent of LGFA bonds were held by offshore investors as at February 28, up 4.5 percentage points in the quarter, with bank holdings down 4.9 percentage points to 35.6 percent, domestic institutional holders down 0.2 percentage points to 25 percent and domestic retail holders up 0.6 percentage points to 3.9 percent.
"It does have implications for New Zealand, because we are a nation of borrowers as opposed to savers, and we do rely on offshore investors," Butcher said. "We're looking to see whether offshore investors are going to remain invested in New Zealand going forward, when you're no longer getting an attractive yield or return. We think that this disadvantage for New Zealand will continue for some time."
Government data today showed foreign investment in New Zealand debt securities shrank $3.27 billion in the December quarter, and showed the third quarterly contraction for foreign investment in general government debt securities.