Government increases Treasury Bill tender

By NZPA

Monday 10th September 2007

The Government is responding to the global credit crunch by increasing the amount of Treasury Bills for sale tomorrow.

After the tender it will consider if it needs to increase the amount of government bonds sold in its next monthly tender.

The New Zealand Debt Management Office (DMO) said today it would sell $250 million of three-month bills at an auction on Tuesday.

This is an increase of $50m on recent sales and $150m more than the amount offered before credit quality became a concern of investors in the wake of the US subprime lending meltdown.

"This increase is in response to the current strong demand for government securities," DMO Treasurer Philip Combes said.

"Relative to a month or two ago there has been a marked increase in demand, and we have increased the volume by more than double," he said.

Investors' appetite for debt instruments issued by governments has increased globally.

As a consequence the "spread", or difference in yields, between three-month Treasury Bills issued by the New Zealand Government and Bank Bills issued by banks has widened to 150 basis points from the more usual 50 points or less.

Treasury Bill yields have fallen while Bank Bills yields have risen.

The Government is, in effect, getting cheap money because of its credit quality and could end up in a position of raising more money than it needs if the situation carries on for too long.

Both government bills and bonds are in short supply in the market because demand has increased.

"This global credit crunch is causing people to increase their demand for the highest credit qualities," Combes said.

The government has been investing the money raised from the extra Treasury Bill sales in the short term pending its use at a later stage.

The Government is currently planning to sell $2.5 billion of government bonds by tender in the year to June 30, 2008. The monthly tenders are generally $200m in size but last month's tender was increased by $100m.

The size of the next tender will be considered after the Treasury Bill tender on Tuesday.

"We will review what we are going to do for our next monthly (bond) tender at the conclusion of the Treasury Bill tender tomorrow," he said.

Increasing the size of the bond tender is an option.

"By issuing now when there is strong demand for our securities, that could just mean we are effectively bringing forward the timing. It doesn't necessarily have implications for how much we are going to do for the full year," he said.

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