More uridashi issuance would be useful for NZ

Monday 14th June 2010

Reserve Bank Governor Alan Bollard said a pickup in sales of so-called uridashi bonds, which dwindled in the face of New Zealand’s record low official cash rate, would be “desirable.”

Last week, Bollard told Parliament’s Finance and Expenditure Committee that he had no concerns about a return of the carry trade, where investors take out low interest loans in one country to invest in a higher-yielding asset in another, with yields more attractive in other currencies such as the Australian dollar. Uridashi bonds are sold to retail investors in Japan seeking to benefit from higher yields available in overseas currencies.

They are the equivalent of eurobonds, which aim to tap the same demand from European investors. Detractors, among them New Zealand exporters, used to complain the sales were evidence of hot money chasing high rates that would drive up the kiwi dollar and erode the value of export returns. Some $4.6 billion matured in a single month, July, last year.

“Uridashi issuance is pushing up a little bit, but off very low levels, and some of that’s desirable rather than undesirable,” he told politicians.

New uridashi and eurobond issuance has totalled about $2.5 billion since March, according to Bank of New Zealand statistics, and has failed to keep pace with the value of maturing bonds, which has averaged about $900 million a month this year.

“The drying up of Uridashi issuance has left banks short of a natural counterparty for their need to hedge their mortgage book through the swaps market,” said BNZ strategist Mike Jones. “It’s hard to foresee a sustained pickup in NZD Eurobond issuance any time soon. It is simply a better bet to invest in AUD Eurobonds, from both a risk and a return perspective.”

Imre Speizer, markets strategist at Westpac Banking Corp., said uridashi issuance has come back markedly from its heyday in 2007, and it will be a while until New Zealand’s interest rates become attractive to foreign investment than those across the Tasman.

Bollard embarked on tightening monetary policy last week when he hiked the official cash rate a quarter-point to 2.75%, the first increase in three years, and narrowing the interest rate differential between New Zealand and Australia.

Still, the Reserve Bank of Australia began lifting rates last year, after the so-called ‘lucky country’ avoided a recession, and it will be several meetings before New Zealand’s rates catch its neighbour’s.

Though Bollard told MPs the currency needs to come down from its elevated level, the major factors, such as China opening up the sensitivity of the yuan and the U.S. adopting a more accommodative monetary policy, were out of his hands. Still, he said he was confident the economy’s rebalancing towards increased savings will help keep the kiwi dollar from getting too over-valued in the long-term.

The kiwi dollar surged to 63.36 yen from 62.92 yen on Friday in New York, and rose to 56.95 euro cents from 56.62 cents. It climbed to 69.06 U.S. cents from 68.69 cents.

Businesswire.co.nz

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