NZDM picks up its pace of issuance, but maintains consistent funding strategy

New Zealand Debt Management (NZDM)’s Kim Martin talks about the government issuer’s strategy for dealing with a higher funding requirement and the global inflation outlook, changing offshore investment drivers and the response to the government’s Wellbeing budget.

New Zealand government bond (NZGB) issuance for fiscal years 2020 and 2021 is forecast at NZ$10 billion (US$6.5 billion) a year, which is NZ$2-3 billion more than NZDM has been issuing in recent years. Does the increased funding task change the strategy when it comes to the mix of syndications and tenders?

Our preference remains to launch new bonds via syndication, supplemented by regular tenders of outstanding lines.

In calendar 2019, we issued almost NZ$10 billion without causing any indigestion in the market. This was done through a syndication of the new 2031 NZGB and undertaking regular weekly tenders of NZ$50-$250 million.

The weighted-average maturity (WAM) of NZDM’s debt portfolio has consistently extended in recent years. Is further lengthening of the issuance profile an ongoing goal and is there a target for where you’d like it to be?

Over the last decade, we have increased the WAM of the NZGB portfolio to about eight years from about 4.5. Our recent reinvigoration of the IIB [inflation-indexed bond] market, with its longer-dated issuance, has contributed to this.

We do not have a specific goal in mind for WAM. However, the size of our annual programmes, and our desire to maintain good liquidity in outstanding lines placed at regular intervals, places a natural constraint on how much further we can easily extend the WAM.

Inflation expectations have collapsed across the developed world in recent years, in particular over the last 12 months. Has this affected demand for IIB product or NZDM’s issuance strategy?

One small change we announced at the 2019 budget was a reduction in the rate of issuance of IIBs. We have indicated we will issue about NZ$500 million of our annual programme in IIB format in the current fiscal year, which is down from about NZ$1 billion the previous year.

This update to the expected issuance profile was based on our assessment of supply-demand dynamics and took into account inflation at breakeven levels. However, we remain firmly committed to the IIB product in our funding strategy.

We believe that we need to have a decent volume on issue to be relevant in the global IIB market. This, along with our own balance-sheet considerations, leads us to have a higher proportion of IIBs on issue in our funding portfolio than many or our peers.

Offshore holdings of NZGBs have been trending lower in recent years. Did the cash rate cut from the Reserve Bank of New Zealand in 2019 exacerbate this?

Not specifically. The proportion of NZGBs nonresidents hold has stabilised at a bit more than half over the last year. It has declined steadily from about 70 per cent since 2015.

This broader trend coincided with the narrowing of the official cash rate (OCR)-Fed funds rate differential and related outperformance of NZGBs. So, more broadly, a lower relative OCR has definitely contributed to the lower proportion of nonresident holdings.

However, we note the total value of nonresident holdings of NZGBs has been increasing since the middle of last year. The other side of the equation, of course, is ongoing healthy demand for NZGBs from domestic investors.

How interested are global investors in the New Zealand government’s Wellbeing budget? Have you had any feedback from investors on whether the focus on social outcomes makes any material difference to their assessment of New Zealand government debt?

Offshore investors are interested in whether the new Wellbeing budget affects fiscal strategy and the amount of debt to be issued. We point out that the Wellbeing budget has been delivered alongside the government’s continued focus on fiscal prudence and its budget-responsibility rules.

We have also had some interest in the Wellbeing budget in the context of the ESG [environmental, social and governance] practices of issuers, reflecting what we see as increased investor interest in this area.