The latest Bill English budget left little trace on the financial services industry last week bar a slight warp in bond prices and a whiff of hope for the country’s most high-profile sovereign wealth fund.
In a budget widely-described as ‘sensible’, English promised to pay down government debt at a faster rate than previously anticipated by markets.
The move, which will see the New Zealand Debt Management Office (DMO) pare back $8 billion of bond issuance over the next four years, could see yields compress further with investors prepared to pay a “scarcity premium”, according to Christian Hawkesby, Harbour Asset Management head of fixed income.
Hawkesby said with local economic and political indicators still looking relatively sound, continued competition for NZ government bonds from home-based and offshore investors combined with less supply could result in lower yields.
“But relative to the expected path of monetary policy, NZ government bond yields are already low,” he said.
Nonetheless, Hawkesby said immediately after the budget announcement NZ bond yields did drop by about 5 basis points as investors digested the news.
NZ government bond yields also dropped markedly in the first post-budget DMO auction held last Friday with average weighted yields falling to 2.88 per cent compared to 3.17 per cent in the previous sale.
Over 50 bidders offered a total of more than $700 million for the $150 million tranche of NZ government bonds.
Warren Potter, AMP Capital NZ fixed income portfolio manager, said the budget measure amounted to a “meaningful reduction” in government bond supply over the next few years.
And while the NZ bond/interest rate swap spread widened post-budget, Potter said the market would adjust to the new supply parameters over time.
“It will take a while for investors to digest the changes,” he said. “Over the short-term there may be some price pressure at the margins – there’s still reasonable interest [in NZ bonds] from offshore investors.”
However, Potter said seasoned bond investors were unlikely to “chase” yields down based on short-term supply issues.
He said the DMO was also committed to maintaining a healthy bond market “over the cycle” with issuance unlikely to sink to pre-GFC levels.
Potter said prior to the financial crisis the government was focused on cutting gross debt, which choked off supply to the bond market, whereas the current policy aims at reducing “net debt”.
“The DMO will want to keep the bond market at a size that functions smoothly and attracts interest from investors like us,” he said.
With a budget surpluses penciled in for the next few fiscal years, English said contributions to the New Zealand Superannuation Fund – halted in 2009 – would resume in the 2020-2021 fiscal period, two years earlier than previously announced.
After running on its own steam for almost seven years, NZS has grown to just over $30 billion at the latest count, piling on almost half of that in the last five years.
NZS declined to comment on the revised contribution restart program.