Friday 11th February 2011
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Holders of New Zealand government bonds enjoyed spectacular returns in January as demand for bonds, particularly from foreigners, drove yields lower in the secondary market.
The gain was particularly good when compared to United States Treasury bonds, because yields rose during the month in that market.
ANZ's credit team wrote that while sovereign credit concerns continued to simmer in Europe over December and January, in New Zealand strong dairy prices and the Government's renewed commitment to fiscal discipline "captured significant market attention".
"The New Zealand bond market was the darling of the dollar bloc," ANZ economists said in a credit focus report.
The yield of the New Zealand government bond maturing in May 2021, which is the benchmark 10-year bond, fell 39.5 basis points in January.
David Croy, senior interest rate strategist at ANZ, said the yield of 10-year treasuries rose eight basis points in January, meaning the differential in performance between the two bonds was nearly half a percentage point.
This translates to a capital gain for holders of bonds because the price the bonds are sold at in the secondary market rises when yields fall.
The half a percent difference in yield movement translates roughly to a 3.5 percent out performance in the value of New Zealand bonds compared to US bonds in a month, Mr Croy said.
He said this was a tremendous move in a month and it was against the grain in international markets.
"We have had months like that before but the move is pretty significant," he said.
Overall, the ANZ government bond index for January made a 1.45 percent return in January, which ANZ said was spectacular.
The strong demand caused the New Zealand Debt Management Office (NZDMO) to hold the biggest bond tender ever when it sold $950m worth of bonds on January 13.
Investor interest was greatest for the $450m of May 2021 bonds, which sold at a weighted average yield of 5.67%, which was below the 5.71% in the market, indicating strong demand. This maturity sold to just two investors.
The DMO issued $1.45 billion of bonds in December and a further $1.7 billion in January, rounding out exactly $10 billion of issuance for the fiscal year to date, ANZ said.
This puts issuance well ahead of schedule against the DMO's new target of $13.5b for the year to June 30, 2011.
"We suspect the programme will continue to be increased as the year progresses, provided demand remains strong. In that sense, greater issuance reflects increased demand, not increased supply, and as such should not be viewed as necessarily price negative, ANZ said.
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