MARTIN We received a lot of questions about our inflation-linked product. There appears to be genuine interest in inflation-indexed bonds from our global investor base, which seems well-informed. This interest doesn’t necessarily filter through to what we are seeing in demand for regular tenders, though.

It has also been useful to share ideas with our peers that have inflation-indexed bond programmes. This has become quite topical. For instance, Canada recently decided to stop issuing inflation-linked bonds after quite a long history. We are in a different category, as we remain committed to the product and are doing what we can to improve liquidity.

WAIT The domestic market doesn’t have the capacity to buy large amounts: if an investor wants to sell a decent lick of bonds, we don’t have the depth of investor base domestically to take it off their hands. The interbank market also doesn’t like having linkers sitting on its books, because they are difficult to hedge. It creates P&L volatility.

What is the answer? Ideally, we have to grow demand from domestic investors. Whether this means getting linkers into the local index or encouraging KiwiSaver funds to have some inflation protection, we need to work out a way to get the domestic client base more involved. A pick-up in domestic turnover will encourage more confidence from intermediaries that they can take risk on their books and slowly recycle it.

AUSTIN For now, linkers remain an off-benchmark trade in what is seen as a relatively complex market
with less liquidity. A step change in domestic demand will likely be driven by asset consultants seeking to include inflation-indexed securities in fixed income benchmarks used by fund managers. As KiwiSaver balances grow and New Zealand’s savings industry matures, inflation product should become increasingly relevant.