Imminent rate hikes spur demand for New Zealand assets, boost kiwi

04-Mar-2014 Intellasia | Reuters | 6:00 AM Print This Post

Anticipating New Zealand’s first monetary tightening cycle in 10 years, yield-hungry global investors are again piling into its financial assets, hinting at a return of the “kiwi carry trade”.

That could push the currency to its highest level since it was allowed to trade freely in 1985 and provide an uncomfortable reminder to policymakers of the flood of capital that shook the economy eight years ago, leading to the loss of the country’s coveted gold-plated credit rating.

The economy is recovering faster than its developed world peers following the global financial crisis and the central bank has flagged it will raise interest rates as soon as next month to keep a lid on inflation risks spurred by strong agricultural and construction sectors.

Overseas demand for a recent debt offering in New Zealand by a foreign entity – a NZ$550 million issue from the International Bank of Reconstruction and Development – was the highest to date, arranger ANZ said. Three quarters of the offer was snapped up by offshore accounts, compared with around half seen on most so-called kauri bond deals in the past year.

“New Zealand’s economic outlook and relative attractiveness of its yields is probably a key factor,” said Glen Sorensen, director of syndication at ANZ in Wellington.

“The RBNZ’s tightening cycle has been anticipated for some time and as such has been reflected in higher term yields, which is a positive driver for kauri bonds.”

Supply of kauri bonds doubled in 2013 from 2012 to hit NZ$5.46 billion, near the record high of NZ$5.53 billion in 2007.

Issuance has soared on the back of rising New Zealand swap rates, which have raised the yields offered on these bonds compared with the country’s sovereign debt offerings, while a government plan to reduce bond issuance has created demand for highly rated financial products.


The rate cycle and rise in the New Zealand dollar is reviving the carry trade, where foreign investors use lower-yielding currencies to fund investments in higher-yielding assets. That could drive an already strong New Zealand dollar towards 80.00 against a currency basket, which would be its highest level since the kiwi was floated in 1985. It was 78.51 early on Monday.

Foreign capital flooded into New Zealand between 2004 and 2007, when official policy rates rose as high as 8.25 percent.

At the time, Japan’s brigade of yield-seeking mom-and-pop investors collectively termed “Watanabe”, were major investors through kiwi-denominated uridashi debt – issued by foreign entities specifically for the Japanese retail market.

The uridashi market dried up when the central bank began cutting rates after the 2008 global financial crisis and signs now suggest Japanese investors are mostly waiting in the wings for higher returns before looking to invest again in New Zealand assets.

“Interest rates on the kiwi are now coming back above those on the Aussie, but I think it will take some time for a product that has slowed down sharply to catch fire again,” said Sayaka Ikegami, a marketing director for primary fixed income products at Daiwa Securities in Tokyo, one of Japan’s biggest sellers of uridashi bonds. “Right now Japanese investors have many other emerging currencies to choose from.”

Still, investors elsewhere may see New Zealand as a relatively safe bet, market sources said, especially after the selloff this year in emerging markets. By comparison New Zealand provides an attractive middle ground to investors looking for higher yields in a stable country with solid economic fundamentals, they said.

“It is a hunt for safe yield. With New Zealand being a more stable albeit small economy, it’s viewed as a safe harbour, if you like… although it doesn’t yield as much as Brazil or Turkey,” said a manager of European syndications in London, who declined to be identified because he was not authorised to speak publicly to the media.

The prospect of foreigners owning more New Zealand debt highlights though the perennial bugbear of the island nation’s open economy, which has a long-standing current account deficit. Offshore holdings of government securities reached nearly three-quarters of outstanding debt by mid-2008 as the country’s banks looked overseas for funding to service a borrowing binge creating a huge liability for the country’s trade balance.

Ratings agencies Standard & Poor’s and Fitch blamed foreign debt levels as the major reason for cutting the country’s prized triple-A credit rating in 2011.

S&P sovereign analyst Craig Michaels said external debt remained a key risk dogging New Zealand, but a reduction of bank funding requirements had made it a smaller issue than previously.

“Stronger demand for New Zealand dollar assets from foreigners over the next few years is likely to increase but not to the degree that we saw before the global financial crisis.”


Category: Regional

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