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Quake to push up Kiwi bond yields

Monday 6th September 2010

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New Zealand government bond yields are likely to rise in the wake of the Canterbury earthquake, though the effects are likely to be short-term.

The earthquake "will possibly have a short-term effect," said Andrew Michl, who helps manage $2.5 billion in fixed income and cash at ING (NZ).  

The Earthquake Commission may sell some of its holdings of New Zealand government bonds to raise cash to meet claims from Canterbury, which it has initially assessed at $2 billion.

The EQC's Natural Disaster Fund holds about two-thirds of its $6 billion of assets in New Zealand government bonds. However, Michl said the government's payout for the demise of South Canterbury Finance was a larger fiscal event than the earthquake, and the direction for bonds was being set internationally by US Treasury bonds.

"Internationally, bonds have sold off in the last week. We've been following US yields," he said. 

The benchmark 10-year government bond fell today, pushing the yield up 10 basis points to 5.41%. The 10-year Treasury note climbed about 8 basis points to 2.71% on Friday after Labor Department figures showed the US economy shed fewer jobs than expected, easing fears of a double-dip recession. 

Westpac economists said the total damage bill amounts to about 1% of gross domestic product, meaning the scope of the disaster is "manageable" with limited implications for financial markets. 

It estimates the disaster could contribute 0.13% to the consumer price index, assuming Canterbury's construction costs rise 20%. A hike to the official cash rate this month, already dimmed by the failure of SCF, "is now even more remote a prospect." 

Based on a 1998 NZIER study of the potential costs of a earthquake in Wellington, the short-term income loss from the Canterbury quake could be $300 million, or 0.2% of GDP, Westpac said. 

At $2 billion, the rebuilding work in Christchurch would amount to 26% of New Zealand's annual construction spending and the region's economy is likely to get "a substantial boost from reconstruction activity," the bank said.

Companies likely to benefit from a surge in construction activity for quake repairs gained on the NZX today.

Fletcher Building, the nation's biggest construction company, rose 4.3% to $8.08 and Steel & Tube Holdings, which sells building products like reinforcing rods, jumped about 6% to $2.33. 

The New Zealand dollar didn't move much in US trading when the quake struck in the early hours of Saturday morning. The kiwi recently traded at 71.86 US cents, from 71.56 cents in New York on Friday.

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