Local govt eye on US Treasuries

Local Government New Zealand’s funding body is closely monitoring investment in its bonds as US Treasury yields increase, with concerns borrowing costs may rise if foreign investment demand drops off.

The Local Government Funding Agency (LGFA) is the second-largest issuer of debt securities in New Zealand behind central government. At LGNZ’s quarterly media briefing in Wellington , LGFA chief executive Mark Butcher said yield forecasts show government bond yields are expected to be lower than US Treasury yields for terms out to nine years. The yield on New Zealand’s 10-year government bond was recently at 2.96 per cent, up from 2.75 per cent at the end of 2017, while US 10-year Treasuries are at 2.84 per cent, having climbed from 2.41 per cent.

LGFA expects offshore interest rates to keep increasing, while New Zealand’s Reserve Bank has signalled it won’t move for at least another year. Some 40.5 per cent of LGFA bonds were held by offshore investors as at February 28, up 4.5 percentage points in the quarter, with bank holdings down 4.9 percentage points to 35.6 per cent, domestic institutional holders down 0.2 per centage points to 25 per cent and domestic retail holders up 0.6 percentage points to 3.9 per cent.

“It does have implications for New Zealand, because we are a nation of borrowers as opposed to savers, and we do rely on offshore investors,” Butcher said.

Government data yesterday showed foreign investment in NZ debt securities shrank $3.27b in the December quarter. — BusinessDesk