* Local currency debt issuance already over prior full-year
* Drop in government bond sales leaves excess demand
* Stable currency and higher yields lure overseas buyers
By John Weavers
SYDNEY, Aug 26 (IFR) - As the New Zealand government scales
back bond issuance, overseas appetite for the New Zealand dollar
is driving a record year for the Kauri market, where foreign
entities offer bonds denominated in the New Zealand currency.
Two deals in Kiwi dollars, as the currency is also known,
last week lifted this year's record total of so-called Kauri
bonds, named after the country's iconic giant trees, to more
than double the amount raised in all 2012.
That shows investors are widening their hunt for assets in a
currency seen as offering a relatively high yield for relatively
New Zealand government bond issuance is forecast to shrink
to NZ$10bn (US$7.8bn) in the fiscal year that began on July 1.
That is a big drop from the NZ$19.5bn issued in fiscal year
2010-2011 as reconstruction costs mounted after the Canterbury
and Christchurch earthquakes.
Issuance had already fallen to NZ$13.5bn and NZ$14bn in the
following two years.
The supply slowdown has been accompanied by an elevated bid
from overseas investors for high-quality government bonds in
non-core currencies. Foreigners owned 67.9% of New Zealand
government bonds in July 2013, up from 60.1% in July 2011 and
62.8% in July 2012.
This demand has helped keep government bond yields
relatively low in New Zealand which in turn boosted the
attractiveness of Kauri bonds as spreads widened. It also meant
that as investors found less government bonds available and
wanted to continue to invest in bonds denominated in Kiwi
dollars, they had to find other options.
Issuers have taken full advantage of this increased
interest. Two deals last week by International Bank for
Reconstruction and Development and International Finance Corp
have brought year-to-date Kauri sales up to NZ$4.95bn. This is
more than twice 2012's NZ$2.3bn whole year total, and exceeds
2007's NZ$4.3bn annual supply record.
HIGH QUALITY, HIGH YIELD
New Zealand has become a prime destination for global
investors in recent years given that its local bond market has
offered a significant yield premium to Treasuries, in spite of
the country's high Aaa/AA/AA credit rating. The average premium
offered by 10-year New Zealand government bonds over US
Treasuries with the same maturity has ranged from 190bp to
Meanwhile, the close-to-close volatility over 21 days of the
New Zealand dollar has ranged from 6% to 12% in the past two
years, remaining at the bottom of the band most of the time.
With a track record of few nasty surprises, Kiwi fixed-income
investments have become even more attractive.
Kauri issuers are typically well established, Triple A rated
multilateral banks that provide an attractive pick-up over New
Zealand government bonds in a currency where high-quality
alternatives are limited. Hence, they have always been favored
by local investors.
Local banks are especially keen on high-rated Kauri bonds,
given that New Zealand regulators allow their use in repurchase
agreements and as collateral for short-term interbank lending.
Foreign demand has also expanded, especially among Asian
official institutions, asset managers and private banks. For
IBRD's NZ$500m five-year Kauri issue in February, for instance,
New Zealand accounts were allocated 53%, Asia 46% and Europe 1%.
"In previous years over two-thirds of Kauri issuance might
typically be bought by domestic investors, whereas this year the
split has been more fifty-fifty with offshore accounts sometimes
taking the majority," said ANZ Bank New Zealand syndication
manager Glen Sorensen.
SUPPLY AND DEMAND
The other major factor behind the Kauri market's expansion
has been the relative rise of Kiwi swap rates, particularly in
comparison with Australia.
Kiwi five-year swap rates were around 100bp below Aussie
five-year swap rates in December 2011. This represented a
significant disincentive for international investors to buy in
New Zealand dollars when the same names were available in
Australian dollars at a higher yield.
However, the subsequent turnaround has been dramatic, with
Kiwi five-year swap rates 71bp higher last Wednesday at 4.37%
versus 3.66% in Australia.
The redemption of a jumbo, NZ$11.4bn New Zealand government
bond on April 15 this year also forced investors into large
Kauri deals at the start of 2013 as they sought to reinvest in
the same currency.
The supply and demand equation looks good for next year,
too. The government is due to redeem a NZ$10.805bn bond in April
2015, and the New Zealand Debt Management Office sees a further
decline in government bond issuance in 2014-2015 to NZ$8bn.