WAIT The way we trade in a bear market is quite different from how we operate in a bull market. Book size generally must be smaller and there is a lot more random volatility.

No-one would have expected the size and speed of the moves central banks made once they decided inflation was a problem they had to get on top of. The idea of the US Federal Reserve increasing rates by 75 basis points in a single meeting would have seemed completely off the table three or four months ago.

Markets are really struggling between the opposing forces of how bad or how sticky inflation will be and how the economic slowdown will play out. Will we get a recession? How hard will the landing be?

We are seeing massive volatility almost every night, as sentiment swings between imminent recession or inflation remaining a problem. As a result, markets are struggling to work out the terminal official cash rate (OCR)’s fair value, where 10-year bonds should trade and what the shape of the curve should look like. Activity levels will remain low and trading books will find it difficult to clear risk while this uncertainty exists.

The New Zealand interest-rate swap market has seen the greatest deterioration in liquidity over the last 12 months. Regular 10-20 basis point daily ranges have taken a toll, risk appetite is low and the number of active participants has fallen. Consistent tight outright pricing in 2-5 years is a distant memory and we frequently see days where there is no outright trading.

Our bond market has always had liquidity issues so it has actually fared relatively better than the swap curve, and even major markets such as US Treasuries and Australian Commonwealth government bonds – probably because New Zealand bond traders are used to operating in a market with a vacuum of prices. However, when liquidity dries up in hedging markets it affects overall liquidity.

New Zealand credit has mostly been well behaved. Credit spreads have widened but not to the same extent as we have seen in offshore markets, due to solid retail demand. There has been consistent demand from retail investors even as yields have pushed higher.

PAREKH This is where the concept of the neutral policy rate plays a part. In March 2020, our assessment was that we needed to provide as much stimulus as possible – which implied the need for a policy rate far below neutral. Right now, the aim has been for the committee to get back to neutral as quickly as possible – within reason. This is no different from what other central banks have been communicating.

Once we get to our neutral range, which governor Adrian Orr has indicated currently sits at 2-3 per cent, we will need to ask how far beyond this we go to the upside to meet our goals on price stability.

Every hike brings us closer to the last one in the cycle. This is the dynamic the market will have to assess and attempt to price. We are trying to contain inflation and bring it back within our target band. The market has priced in two more 50 basis point hikes, in July and August, which will get us to the top end of the neutral policy rate range.

When assessing how far we are from our goals, it is not just about GDP and CPI data prints. It is also about what the soft data is telling us, for instance the information our market and business intelligence is providing. All this goes into the decision-making process and we have to weigh up all the information at each monetary policy meeting.

AUSTIN We have gone through a period of 12-18 months where short-end yields have risen to 4 per cent from about zero. On average, there have been monthly rate increases of more than 20 basis points, which is a pretty extreme environment. Unfortunately, it has not been an easy trend for investors to trade. We have had daily swings that are a bit like going to a casino and picking red or black.

In this environment – with bond indices generating negative returns in some months and credit spreads widening in general – it is very difficult for fund managers to hold positions and withstand the P&L swings. The natural behaviour is to reduce risk, stay on the sideline and wait for more clarity.

SPEIZER Over the past six months there has been a pickup in interest in the New Zealand market where during crises New Zealand asset classes are typically relegated to lower-order interest. My guess is the interest is a product of the sequencing of the Reserve Bank of New Zealand (RBNZ) relative to other central banks.

The RBNZ was first among major central banks to begin raising rates and it is likely to complete its tightening cycle well before others. New Zealand is a very interesting litmus test – it has signalling power. It also means New Zealand may present opportunities related to the turning point in rates earlier than other countries.

When rates will turn is an interesting question. There have been five other tightening cycles in New Zealand and, typically, markets cease to overshoot and start looking ahead to an easing cycle one or two meetings before the end. This type of reversal may occur earlier this time, because the speed of central bank tightening – not just in New Zealand – has been a lot faster. I think markets will turn earlier than they have historically.

PAREKH Wage growth is trailing inflation but it is reasonable to expect pressure for higher wages. We would be concerned if we started to observe a wage-price spiral that resulted in expectations of inflation being persistently above our target. Dampening demand through raising the OCR aims to prevent a situation where inflationary pressures become embedded and wage gains are eroded.

On the other hand, we would also be concerned if wages were growing slowly relative to the cost of living for a long time, as this might be a sign that the labour market is not strong. Currently, we think the labour market is very strong.

SPEIZER The wage-inflation catch-up will be stronger than we have seen in the past. We forecast headline inflation eventually settling closer to 3 per cent than 2 per cent, partly due to wages. Annual migration into New Zealand might be closer to 30,000, compared with the 50-60,000 experienced over the last decade, which will also support wages.

KENDALL It has been a challenging few years for all New Zealanders, but especially for those who are most vulnerable. The housing waiting list has increased significantly, to about 27,000 from less than 10,000 four or five years ago. The squeeze on household budgets from high inflation is making things even harder.

Inflation is having a significant impact on our building costs. We are experiencing significant increases in material and labour costs, with the availability of both also very challenging. COVID-19 has caused delays and this ultimately means we will have to borrow more than we previously anticipated to deliver the same number of houses. The cost of the additional debt along with higher interest rates is flowing through to our budget, causing further challenges. Our focus is to make sure our funding model is sustainable.

None of this has changed what we are doing as an organisation. We are progressing through our large build programme as quickly as possible in a sustainable way, as well as enabling more housing construction through our urban development programme.

CARTER One highlight of this year has been the robustness and resilience of the New Zealand dollar market compared with offshore. Issuers that have taken a pragmatic approach to execution strategies and, in particular, issued into tenors with identified pockets of demand have typically achieved strong transaction outcomes.

This playbook is likely to remain for the near term, with flexibility being the keyword. Flexibility is important and we are cognisant of domestic and offshore data that can affect appropriate execution windows.

In addition, we have had to navigate several headline risk events over the past six months. At the start of this period we had issuers considering the market – or actually in market – which required analysis of events and potential scenarios that were out of our control. Ultimately, we managed this and were able to achieve good outcomes despite the global backdrop.

How the inflation versus recession theme evolves will be interesting. Some of the feedback from offshore accounts is that the RBNZ has perhaps overshot its forecast. This may eventually mean some accounts will consider duration again, especially if the delta to New Zealand government bonds (NZGBs) is attractive.

DODDRELL The New Zealand primary market has been a standout performer in 2022. When we look across the Tasman Sea, our Australian colleagues are somewhat surprised about the access to market our issuers in the high-grade and corporate sectors have.

MARTIN We have a structured approach to our issuance so we do not simply turn off the tap during market conditions that are less advantageous. We have been quite pleased with the cover ratios for our tenders in the year to date – they are averaging about three times. However, demand for long-end bonds has not been as strong. Therefore, within our structured approach we have chosen to tweak our monthly tender issuance to weight toward shorter-dated bonds.

Offshore investors have commented on volatility and the deterioration of liquidity across all markets, and New Zealand is no exception. However, most investors have also said New Zealand liquidity has actually improved a little on a relative basis.

The key takeaway for us is that we need to put even more emphasis on clear communication in volatile markets. We have tried to do this as much as possible in explaining our approach to buying back bonds from the RBNZ’s large-scale asset purchase (LSAP) portfolio.

If things deteriorate from here, we have a very large cash liquidity buffer and we still have plenty of capacity in our short-dated issuance programme. We are feeling comfortable from an issuance perspective, but we are cognisant of how investors and traders are experiencing markets.

MARTIN We have stated our expectation to do two syndications before the end of the calendar year. However, we consciously left this window pretty wide so we can choose our timing. At this point, I still think this is a sufficiently wide window for us to find two good opportunities.

BUTCHER The rates market might be under stress but the credit market is not under as much as we have seen previously. High-grade spreads to government bonds have widened but they have moved in line with global trends and spreads to swap have not moved substantially. If anything, we have seen spreads recover modestly in the last month.

This is partly because most issuers have been responsible and flexible about issuance. For instance, we have tendered each of the 11 bond maturities on our curve in the past year to test where there are pockets of demand.

Tenders are good for us, but syndications let us get volume done. We have undertaken 60 per cent of our issuance via syndication since we started using it in 2019. This has been a big shift. I do not think we could have done NZ$3.9 billion (US$2.5 billion) of tenders in the past year – it would have meant 10 tenders of NZ$390 million each.

We are flexible, and we spend a lot of time looking at secondary turnover and compositional changes in our bond holdings. We have been meeting market demand on maturities, volume and timing, and this has played out really well for us.

We have increased the cap on each of our bonds to NZ$2.5 billion from NZ$2 billion, giving us more flexibility. We would not have done this if we did not think there was some additional depth and breadth to the market.
Ultimately, we feel we can easily do NZ$2.5-3 billion annual funding programmes going forward. The market has not gone backwards – it is a bit disrupted but not as bad as we have seen previously.

KENDALL We have developed an agile and streamlined approach to our issuance. With syndications, we have had to look for patches of more positive market sentiment and pricing, and move very quickly to take advantage. We have kept up ongoing dialogue with our investors and banks to stay informed.
With regard to our monthly bond tender programme, we listen to investor and bank feedback and take this into account when it comes to deciding which lines we will issue into.

BISHOP We have not had large requirements over the last three months and this is also the outlook for the next nine months. We have not seen our credit margins move out materially at all – the market has certainly not reacted like it did during the financial crisis or at the outset of COVID-19 in March 2020.

PAREKH Currently, inflation is above our target band and we consider employment to be above its maximum sustainable level. As a result, both elements of our objective are working in the same direction and are consistent with the need to tighten monetary policy – as announced at our last monetary policy statement in May and in mid-July with our latest monetary policy review.

On this basis, the committee has responded promptly to inflation. It is about trying to get inflation and inflation expectations back within the target band of 1-3 per cent.

Given the flow of economic data has become more consistent since the onset of COVID-19, there is less scenario modelling and more data-based modelling. We are more confident about what we are seeing in the short term. The global economic environment is also important and will factor into our decision-making.

There is also the tradable inflation dynamic. The global hiking cycle has seen the New Zealand dollar decline, pushing up import prices and adding to tradable inflation.

While hiking rates in New Zealand will reduce domestic demand, the extent to which it affects the tradable side of the economy will be determined by the products we are importing. This is significantly affected by the currency and higher global prices. Oil is obviously the key factor here. We are balancing all this information in our decision-making.

PAREKH The intent of the LSAP programme was to have a big impact from a stimulus and market functioning perspective. The opposite is the intent on the way out – the RBNZ wants to minimise disruption as much as possible. The focus should be on the OCR as our primary monetary policy tool.

We are also trying to minimise market disruption as we proceed with the LSAP sell-down. The difference between what we are doing and what other central banks might do comes down to the way our market is structured.

As such, we were able to design our sell-down in a way that it is reasonably mechanical in nature. The volume is sufficiently slow and steady that it should not have an impact on short-term market price action. It might positively contribute to market conditions as we have some certainty of balance sheet holdings and run-off.

WAIT Limited. We do not have many lines to start with and we have a good repo facility with the RBNZ. We are not looking at particular lines with a view on the free float and therefore whether or not to sell.

The way this will unwind, with NZDM not going back to the street, will also reduce the impact. There was some concern that NZDM might have to issue more long-term bonds effectively to fund LSAP assets coming back from the RBNZ. But actually the issuance programme will not really change.

MARTIN The RBNZ has stated it will be selling back bonds from the longest maturities first, while the shortest-dated bonds will simply mature. On our side, we will buy back the bonds being sold once a month. At this point, the bonds are essentially retired.

The need to fund the purchases has already been incorporated into the annual bond programme we updated at the May budget. We will issue the entirety of the programme as part of our funding strategy. To be very clear, just because the RBNZ sells back a 2041 maturity, for example, does not require NZDM to issue an identical bond into the market.

PAREKH The RBNZ recently announced it will be retaining a floor system for monetary policy implementation. Considering this, we are reviewing our operations and facilities. We want an effective system and a range of tools we can use to achieve our policy objectives at all levels of settlement cash.

Large ESA system balances are not necessarily inhibiting monetary policy effectiveness. The RBNZ retains control over the volume of cash in the system and can inject or withdraw cash balances to suit short-end market conditions.

The focus for the RBNZ is the short-term interest rates we monitor, and we will manage the settlement cash level (SCL) in response to fluctuations in these rates.

For the LSAP, sales occur outside the system as the transactions are between the RBNZ and NZDM. This said, the NZDM funding programme will be higher after considering LSAP sales and will therefore result in a lower level of cash in the system, all else being equal.

We do not anticipate cash falling to levels seen pre-COVID-19, as is the nature of a floor system, but we can expect SCL to be materially lower than where it currently is. This is likely to occur over the next year as our LSAP sales commence, alongside some bond holdings maturing and other facilities coming to an end. These flows will also occur alongside organic cash flows, such as tax revenue.

SPEIZER We wondered whether the record high level of settlement cash balances would be at odds with the direction of monetary policy. The short answer is probably not, because the evidence suggests the cash is not circulating much. One obvious reason for this is rising interest rates deterring borrowing.

There is some evidence of distortion in parts of the financial market, for example in short-dated FX swaps – which imply New Zealand yields well below the expected OCR.

PAREKH If the level of settlement cash is at odds with the level of short-term interest rates needed to meet our policy objectives, we will actively try to correct this imbalance in the system

DODDRELL The numbers needed to finance New Zealand’s transition are staggering, but if we are committed to it we need to raise the debt to fund it. The New Zealand debt market has a big role to play. We need to remove barriers to access, we need sustainability-linked bonds (SLBs) in the retail market, and we need to show leadership and stay committed to best practice.

New Zealand was a slow adopter of sustainable debt. Our first green bond was launched in 2018, 10 years after the first issuance in Europe. The pace has been slow perhaps due to the requirement to use a product disclosure statement (PDS) when coming to market in retail format. Most issuers access the market in this format, so this requirement has caused a delay in the uptake of sustainable bonds in New Zealand.

What has been pleasing over the past four years, however, has been the amazing growth and interest in sustainable debt generally. Westpac established the first sustainable finance team in New Zealand and we are committed to investing in sustainable finance education and engagement – as evidenced by the annual Westpac-KangaNews Sustainable Finance Summit.

Leadership at board and industry level has also helped. Auckland Council, for instance, created a new PDS to issue its first green bond, and Kāinga Ora retrospectively converted its existing debt instruments into sustainable format and then created wellbeing bonds aligned to the government’s wellbeing framework. LGFA is giving 75 councils the ability to access green debt, which is critical for infrastructure spend going forward.

One of the advantages of a sovereign coming to market in green format is putting ‘New Zealand Inc’ on the stage, so we look forward to NZDM’s inaugural green bond. The leadership we have seen at this level has allowed us to go to corporate New Zealand and show it a well-travelled pathway.

New Zealand may not be a leader in volume of sustainable debt but we have shown strong leadership, innovation and integrity in building and shaping the local market – we have sufficient rigour behind it that it is as credible as other sustainable bond markets. We need to continue to commit resources and share our knowledge to support this. Issuance is one side of the equation, but to get this done we also need to know what investors are thinking. This too is evolving.

AUSTIN A significant portion of end investors want the capital they are investing to make a positive social and environmental difference. As a result, we are also witnessing leadership from the bottom up, with retail investors demanding suitable products. Apart from investing through an environmental, social and governance (ESG) lens being the right thing to do, it also makes commercial sense.

Fund managers have added fully integrated ESG due diligence into their credit assessment processes, which is a big change. ESG has become much more business-as-usual – though it still feels there is a long way to go.

SILVER There is room for growth. The New Zealand market has hovered near NZ$2.7-2.8 billion in issuance each year for the past three years – about 3-4 per cent annual growth. Contrast this with the 60-90 per cent annual growth in the global market over the past three years. It seems this year will deliver record-breaking volume, at least.

If we come back to the point about leadership, there are a lot of pressure points on business to do with climate and sustainability risks, and equally we are seeing a lot of leadership from business on climate and sustainability challenges.

The Climate Leaders Coalition recently affirmed its new statement of ambition, which is a lot more progressive than previous statements. There are risks and opportunities for issuers, and businesses are responding to the signals being sent by regulators, stakeholders and investors. We expect sustainable-bond issuance to trend upward over the next 2-3 years.

A lot more issuers can participate in this market. The PDS requirement for retail sustainable-bond issuance continues to be a barrier, with only one issuer coming to market with a new PDS specifically to support its retail green-bond issuance since the Financial Markets Authority guidance was released.

However, in parallel, we are seeing more diversification in the sectors issuing sustainable debt and in the range of sustainable debt structures evolving in the market. We see the evidence of this in the sustainability-linked loans we structured in 2021 for Genesis Energy, Metlifecare, Warehouse, Christchurch International Airport, Pamu and Spark.

Every issuer needs to be thinking about how its bonds can be aligned with longer-term systemic strategic risks sustainability poses for businesses today, as well as how it can maximise its opportunities through issuance of sustainable debt.

BISHOP I would say labelled issuance is all about raising the profile of ESG issues within an organisation. It is sometimes pointed out that labelled issuance will be cheaper and diversify the investor base. This may be true, but for us it is more about raising the profile of sustainability issues in the organisation. We take several funding and treasury issues to our councillors, but it is our sustainable finance programme that gets the most attention.

KENDALL There are some external benefits, although they are mostly qualitative. We do not have a counterfactual of what pricing would be if our bonds were not sustainability bonds, for instance, though we definitely have access to a wider range of more engaged investors. We are asked a lot of good questions and are challenged on what we are doing.

While the external benefits are positive, most of the benefit has come internally. We have gained a lot of internal discipline from integrating corporate strategy with finance and making sure our outcomes are aligned with our financial capital.

We view our sustainability financing programme not just as a means to raise our profile – it also authentically delivers better outcomes for New Zealanders. Ultimately, the benefits for our tenants are real: they get to live in warm, dry, healthier homes.

BISHOP Any organisation going into sustainable funding must be quite disciplined and focused on what it is doing. There is administration and reporting associated with these types of products, and issuers will get questions from investors about what the company is doing in the ESG space. They must be sure they can answer them in a genuine manner. These deals are not just going to happen by themselves – there is a lot of planning and related work behind the scenes.

PAREKH It is worth mentioning that the RBNZ has been engaging domestically and at a global level on how we can contribute. We have been on a couple of forums with the Bank for International Settlements and the executives’ meeting of East Asian and Asia-Pacific central banks working group on green initiatives. Domestically, we are looking at what we are doing across the RBNZ to support the market and to incentivise the development of a sustainable debt market. We have also embarked on some work to look at our own asset holdings considering our sustainability goals.

BUTCHER Construction costs are running above general inflation. Because infrastructure is debt-funded there are higher interest costs as well. It is difficult for councils with ambitious capex intentions in their 10-year plans to deliver on budget due to supply shortages, and construction and funding costs. There are significant headwinds for infrastructure delivery.

BISHOP Pressures from rising costs absolutely apply at Auckland Council. Obviously, the water reforms might have an impact: if they happen it will free up capacity on the balance sheet for other infrastructure spend, especially on transport. But cost and delivery challenges are very real.

BUTCHER Central government is driving it through as one of its major pieces of structural reform. But it continues to meet resistance from some parts of the local-government sector.

Political and policy issues have also emerged to complicate things, but hopefully we will have seen significant progress by the end of the year. The first part of the legislation is currently proceeding through parliament and there will be additional enabling legislation over the rest of this calendar year.

Larger capex does not come for the proposed new water entities until the late 2020s. The biggest issue for LGFA and Auckland Council is the transition of debt and assets away from the existing holders at council level to the new water entities.

There will be about NZ$10-12 billion of debt, we believe, on the new water entities’ balance sheet when established on 1 July 2024. This will require transition – and the next parts of the legislation will help clarify some of the financial details.

BISHOP Getting back in front of investors face-to-face will be a big step. This is what I am looking forward to.

BUTCHER I am looking forward to the return of long-term investors to the long end of the yield curve, as they have been absent for over the past year. This will show that confidence has returned and that the interest-rate cycle is peaking. This may already be happening.

AUSTIN A meaningful return of long-end interest seems likely in this time frame. New Zealand has the luxury of sitting ahead of the pack in normalising its monetary conditions and benefits from strong fiscal metrics. This stands us in good stead.

This is a landmark year for New Zealand as the inclusion of government linkers and nominal bonds in major global indices has been confirmed in 2022. This increases the relevance of New Zealand to international investors, which has knock-on benefits to all issuers. There is a lot to be optimistic about.

MARTIN There is such diversity in our work at present. We have the LSAP portfolio buyback programme, the inflation-indexed bond and green-bond syndications, and the recent pickup in offshore ownership of our bonds on the radar, which are all very exciting. Also, bank deposits will now be paying well above zero per cent, which might be a cause for excitement for quite a few.

SPEIZER I will add the unwind of QE. On the way in, QE was deliberately a big splash for the RBNZ. On the way out, it will want to be quiet. Will the market digest the flows without a tantrum? Given the QT announcement effect has been trivial, and that the Treasury is intermediating the additional supply to the market, it probably will.

PAREKH One of the things I have taken away from COVID-19 is that while our roles all exist for different purposes, we worked well together. We got the outcomes we needed for the market and the system. We should continue building on this, to ensure New Zealand remains an attractive place to issue and invest, and our debt markets continue to grow.

WAIT One last point to remember is that New Zealand is the canary in the coal mine. We were the first to end QE and to start the tightening cycle. More so than ever, there is offshore interest in New Zealand including how our economy performs. Nominals and linkers being included in global indices should create some positive momentum for high-grade issuers over the next 12 months.

CARTER What is exciting for us is the continued depth and development of the New Zealand debt capital market and the funding solutions it can provide. Notwithstanding the backdrop, the execution outcomes achieved this year highlight the increased depth and resilience of the domestic market. This provides confidence to issuers when considering the remainder of the year.