NZ: Fundamentals for NZGBs are still very favourable - BNZ

Kymberly Martin, Senior Market Strategist at BNZ, notes that the NZDMO’s price guidance, at 25-31bps over the 14 April 2033 NZGB seems to offer a reasonable ‘new issue premium’ relative to quantitative calculations of relative value.

Key Quotes

“This likely reflects a number of factors;

(i) the expectation that investors may need additional enticement to buy a bond which is notably longer than previously issued NZGBs (ii) recognition that the market may be more reticent to add to duration as it is slowly inching up its expectations of a further Fed hike by year-end (iii) the NZDMO balancing its stated funding aims: i.e. to provide value for NZ tax payers while also building loyalty from long-term investors.

We would expect the syndication to attract strong demand from investors with long-term liabilities. We expect it will likely be priced near the tighter end of the indicated range. This would still offer an outright yield of circa 2.88%. This is likely attractive in the current global environment.

Overall, we believe fundamentals for NZGBs are still very favourable (limited sovereign risk, constrained issuance over the next four years, an easing Central Bank and contained NZD risk). Once the syndication volume has been absorbed we expect NZGB outperformance relative to NZ swap and USTs can resume.

Yesterday’s LGFA bond tender also demonstrated that demand for NZD fixed income product remains solid. The auction attracted a sound 3x bid-to-cover ratio, weighted toward the longer-dated LGFA 2027 bonds. These bonds were sold at an average yield of 3.18%. This represents around 92bps over NZGBs.”