Bond programme a booster shot

The Government’s plan to raise a record $165 billion over the next four years caused stir in the bond market but analysts said its higher-thananticipated borrowing requirement would be more stimulative for the economy than expected.

The Government said it planned to raise $60b in the 2020/21 financial year and $165b over the next four years by issuing bonds.

The increased borrowing is expected to take the Government’s debt-to-GDP ratio to 53.6 per cent of GDP by 2020 from just under 20 per cent now.

S&P Global analyst Anthony Walker said the agency’s outlook for New Zealand would remain positive, despite the higher debt load outlined in yesterday’s Budget.

He said the country’s finances will be hard hit in the 2020 and 2021 fiscal years before slowly recovering.

“The positive outlook on our ratings on New Zealand is supported by our expectation that deficits might not peak as high and large deficits might not be as prolonged as the Budget indicates,” he said.

Walker said he expected the New Zealand economy to recover faster than the Budget assumes, aided by the quicker easing of lockdown restrictions than assumed in the document.

“This will support revenue growth and could lower outflows from the Covid-19 response and recovery fund,” said Walker.

Most of the weakening in the Budget’s fiscal forecasts was because of Covid-19-related spending and did not reflect a substantial increase in ongoing expense measures, Walker said.

Westpac senior markets strategist Imre Speizer said the prospect of more bonds coming on stream caused some initial selling in the bond market.

The Reserve Bank said it had almost doubled its bond buying programme to $60b so it could support the market in face of the wall of new government bonds coming on stream.

Speizer said the Budget’s measures could act to ease the pressure on the Reserve Bank if the Government is successful in stimulating economic growth.

Government spending is of course a shot in the arm for the economy and it needs it badly right now. David McLeish, Fisher Funds

“In the big picture, the Budget on the whole is more stimulatory than expected, which means the Reserve Bank might not need to be as active as we thought yesterday,” said Speizer.

“They [the Government] have come out with a big bang. A big dollop of stimulus, so overall it’s a positive,” he said.

Fisher Funds fixed income portfolio manager David McLeish said the forecast of a $165b bond programme was about $50b higher than he had expected.

The yield on the 2031 bonds rocketed up by 20 basis points to 0.73 per cent, reflecting the higher than expected supply. In bonds, yields rise when prices fall and vice versa.

“Government spending is of course a shot in the arm for the economy and it needs it badly right now,” he said.

“That’s a good thing and it needed to be done,” McLeish said.

“But there is no free lunch here.”