NZ bond yields drop sharply on lower Government borrowing programme

New Zealand Government 10-year bond yields dropped sharply after the Treasury released a much-reduced borrowing requirement for the current fiscal year and beyond.

The forecast 2021/22 bond programme has now been set at $20 billion, a decrease of $10b from that published in the last Budget.

The Treasury said forecast bond programmes for 2022/23 to 2024/25 have fallen by $7b each year, to $18b.

“Given the decreased borrowing programme, it is no longer expected that a second new bond will be introduced, via syndication, in 2021/22,”the Treasury’s NZ Debt Management said.

The bond market rallied on the back of the news, with the yield on the benchmark May 2032 bond dropping by eight basis points to 2.33 per cent from 2.41 per cent just before the release of the half-year fiscal update.

When bond prices rally, yields fall.

ANZ strategist David Croy said it was a “sizeable” reaction in the market and one that was “fully justified”.

“Essentially we have seen a significant reduction in supply,” Croy said.

If tomorrow’s bond tender were included, just over $15b in bonds would have been sold in the first half of this fiscal year.

NZ Debt Management had been issuing bonds at the rate of around $500 million a week.

Croy estimated that would drop to $200-$250m a week for the remainder of the fiscal year under the new requirement.

In addition, the market will not need to absorb the second syndication of a new bond issue that was flagged at the last Budget.

The first syndicated 2051 bond issue was conducted in September.

In the half year update, the Treasury said that it now thinks unemployment will fall as low as 3.1 per cent next year, while the economy will grow at 4.9 per cent in 2023, and about 2.3 per cent a year thereafter.

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