NZDM set for structurally higher borrowing

New Zealand Debt Management (NZDM)’s funding requirement for the 2021 fiscal year declined gradually throughout 2020 as New Zealand controlled COVID-19 and reopened its economy. But its task is still historically large. Kim Martin, acting director at the Treasury in Wellington, explains the funding strategy.

What are the plans for meeting NZDM’s higher funding requirement?

The improved economic and fiscal outlook has led to the forecast New Zealand government bond (NZGB) programme for the years from 2020/21 to 2023/24 being reduced by NZ$30 billion (US$21.6 billion) since the May 2020 budget. Even so, outstanding borrowing at the end of this period is expected to be more than NZ$100 billion higher than forecast prior to the onset of the pandemic.

Nonetheless, the New Zealand sovereign remains a small issuer by global standards. Therefore, we continue to concentrate issuance in core New Zealand dollar instruments and focus on maximising liquidity. In 2020/21, nominal bonds are expected to account for around NZ$44 billion of the NZ$45 billion NZGB programme, with inflation-indexed bond (IIB) issuance filling the remaining NZ$1 billion.

Tenders remain our primary issuance vehicle, but we have increased the use of syndication to issue greater volume. Since April 2020, we have undertaken six syndications including for infill bonds, curve extension and taps of existing lines.

We also expect Treasury bills on issue to remain higher than prior to COVID-19, at around NZ$8 billion by fiscal year end compared with NZ$2-5 billion previously. In addition, we reinvigorated our ECP programme in April 2020 to ensure additional flexibility in meeting the Crown’s short-term funding needs, if required.

NZDM extended its nominal bond curve to 2041 in July 2020. Does it plan to go even further out on the curve?

We issued the 2041 maturity bond to re-establish the 20-year point on the nominal curve that had previously been established by the 2037 NZGB. The current structure of the NZGB portfolio provides the option to extend the curve, issue more infill bonds or increase volume in existing lines.

We consider the primary objective of NZDM, which is to minimise the Crown’s borrowing cost over the long term while taking account of risk and to ensure ongoing access to funding markets. Extending the curve would lead to lower refinancing risk but the relative cost is also important. We also consider investor diversification.

We also aim to build volume in existing lines to maximise liquidity. This is particularly relevant in the current environment, where the Reserve Bank of New Zealand (RBNZ) owns a proportion of each bond line. We remain aware of the availability of each line to other investors and weigh this against the benefits of curve extension. All bond lines have capacity as they are some way below their caps – NZ$18 billion for nominal lines and NZ$6 billion for IIBs.

What plans does NZDM have for IIB issuance?

We maintain a long-term commitment to IIBs, which make up a small proportion of our tender issuance. This balances a desire to show a regular ongoing presence in the market with responding to market feedback and relative-price signals. Our current pace of IIB tender issuance is NZ$50 million per fortnight. We receive feedback that natural buyers of IIBs typically prefer longer-dated maturities, to match liabilities.

Our past practice had been to launch a new IIB once the longest-dated line has less than 20 years to maturity. Our longest-dated IIB is the 2040, so in time we will consider a new bond. However, our overall syndication schedule is designed strategically rather than by responding to short-term demand signals.

How does NZDM assess the level of offshore holdings of NZGBs compared with prior to the pandemic?

An enduring volume of NZGBs – nominal and IIB – is held by offshore investors. The total value of nonresident holdings is similar to a year ago, at around NZ$39 billion. As a proportion, offshore holdings have declined marginally to around 50 per cent, excluding RBNZ holdings, from around 52 per cent prior to COVID-19. We note that offshore investors are better represented in longer-dated syndications.

We do not target any particular level or proportion of offshore holdings. We have seen some new investors participating in our market recently, along with some that we had not seen for several years. We understand larger bond lines and more frequent issuance is increasing investor confidence in NZGB liquidity. There have also been more opportunities to participate in syndications, which provide useful focal events for global investors.

We have had feedback that other contributing factors may be relative pricing to peers and New Zealand’s management of COVID-19 and the related fiscal risks.