ANZ: Treasury to boost bond-buying
The Treasury is expected to outline an enlarged bond tender programme at today’s Budget, reflecting in part the need to buy back bonds from the Reserve Bank that were part of its large-scale asset purchase (LSAP) programme.
At last December’s fiscal update, the Treasury said it planned to raise $20 billion in the current year to June 30, 2020, then $18b a year in each of the 2023/24/25 years, followed by $10b in 2026.
ANZ expects today’s Budget to show a lift in the borrowing requirement to $25b in each of the 2023/24/25 years, falling to $15b in 2026.
“Increased government spending (February’s increase to the Covid Fund), the $5b of planned LSAP bond buy-backs from the Reserve Bank each year, and higher interest rates are expected to lift the Government’s funding requirement,” ANZ said in a Budget preview.
“As always, there’s a lot to consider when it comes to guessing NZ Debt Management’s bond issuance,” the bank said.
“Weighing it all up, we see a decent bump to bond guidance from 2023.”
The Reserve Bank’s quantitative easing (QE) bond-buying programme finished last July; the central bank ended up with about $55b in government paper.
The objective of QE — also known as money printing — was to put downward pressure on long-term interest rates at a time when the required fiscal response to Covid-19 would have done the opposite.
The Reserve Bank has said it plans to gradually manage LSAP bond holdings down in a way that maintains the smooth functioning of financial markets.
In February the bank said it would sell $5b of government bonds in each fiscal year, starting from this July.
Bond prices move inversely to bond yields. When prices rise, yields fall.
The Reserve Bank paid top dollar for the bonds bought during LSAP.
Yields then were at near zero and in some cases sub-zero late in 2020.
Bond yields have since risen sharply — to three per cent-plus — and prices have fallen, which means the bank is sitting on big losses.
The Government has agreed to indemnify the central bank on any shortfalls. The Treasury, in its March investment statement, said in establishing the LSAP programme it was understood that uncertainty over the future path of the official cash rate meant it could result in a material gain or loss.
“Interest rates, both current and those expected in the future, have [risen] more than expected since the LSAP programme occurred,” it said.
Based on current interest rate expectations, the net direct fiscal cost from the LSAP programme was expected to be $5.1b, it said.
The Treasury said the ultimate loss or gain from the LSAP programme would not be known until it was unwound.
Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said people were putting “two and two” together as to the size of the upcoming bond tender programme.
First off, Finance Minister Grant Robertson had already communicated that a return to surplus would be a year later than previously indicated. “We will probably get more expansionary fiscal policies than previously and the direction of pressure is for the programme to be increased,” Pepper said.
Secondly, there was the Reserve Bank’s intention to sell its bond holdings accumulated under the LSAP.
The prospect of more bonds coming on stream “doesn’t sound great” for the market, Pepper said.
However, Pepper said New Zealand’s inclusion in the Russell FTSE World Bond index towards the end of this year was likely to result in a pick-up in demand.
While New Zealand bonds will only have a small weighting on the index, there will be new demand at a time of increased supply.
“It’s not all one way in terms of the drivers of our bond market.”
He said New Zealand’s inclusion in the index could potentially unleash $2b to $4b of buying in the first month, and $7b to $9b over 12 months.