New Zealand Government Securities Funding Strategy

2024/25 Funding Strategy – at a glance

The objective of New Zealand Debt Management (NZDM) is to minimise the Crown’s borrowing costs over the long-term with due consideration to risk, while ensuring ongoing access to debt funding markets.

Core principles and achieving a balance between the following three goals:

New Zealand Government Securities Market

• Nominal Bonds: Nominal bonds remain the primary funding instrument. For the 2024/25 fiscal year, issuance will be across multiple points on the curve, with a focus on building up benchmark bond lines. Subject to market conditions, two tap syndications of existing bond lines are expected to be executed in the second half of the fiscal year. The first is expected to be a tap syndication of the existing 2035 nominal bond line in the March 2025 quarter, while details for the second will be announced in subsequent updates.
• Green Bonds: The inaugural Green Bond was issued via syndication in November 2022. Since February 2023, the 2034 nominal Green Bond line has been tendered into on a regular basis. From a portfolio construction perspective, Green Bonds are treated similarly to conventional nominal bonds. Green Bonds form an enduring part of the NZGB programme. 
• Inflation-Indexed Bonds (IIBs): For IIBs, the focus is on supporting market activity and function. A flexible approach to issuance volumes and tenors is taken to align with market demand, while a single price auction methodology is utilised to encourage participation in tenders.
• Short-term Borrowings: Short-term (less than 1 year) issuance is an important part of the borrowing programme.  It is expected to provide a base level of ongoing core funding and flexibility in addressing short-term liquidity requirements. At end-June 2025, short-term borrowings are expected to be NZ$20 billion. A flexible approach to short-term borrowings is taken and the exact split between ECP and T-Bills will be determined by demand and pricing dynamics.
  • Treasury Bills (T-Bills): T-Bills are issued via weekly tenders. A minimum of NZ$3 billion of T‑Bills on issue will be maintained.
  • Euro-Commercial Paper (ECP): ECP is short-term foreign currency issuance. A minimum of US$3 billion of ECP outstanding will be maintained.
• Foreign Currency (EMTN): Programme documentation remains current but unutilised for more than a decade. There is a preference to support activity in NZD products.

Borrowing Programme

At the December 2024 Half Year Economic and Fiscal Update (HYEFU), the forecast New Zealand Government Bond (NZGB) programme for 2024/25 was increased to NZ$40 billion, NZ$2 billion higher than forecast at the Budget Economic and Fiscal Update (BEFU) in May 2024. Across the forecast period (2024/25 to 2028/29), NZGB issuance was increased by a total of NZ$20 billion.

During the early years of the forecast period, when annual funding requirements are highest, short-term borrowings are forecast to be temporarily higher. Short-term borrowings are forecast to be NZ$20 billion at the end of fiscal years 2024/25 and 2025/26, before being put on a downward trend towards previous forecast fiscal year-end outstandings of NZ$13 billion.

In total, gross NZGB issuance is forecast to be NZ$168 billion over the forecast period, and issuance, net of bond maturities and repurchases, is forecast to be NZ$73.3 billion. Across the forecast period, the borrowing programme accommodates the repurchase (NZ$15 billion) and maturity (NZ$14 billion) of bonds from the RBNZ’s Large-Scale Asset Purchase portfolio, which will need to be financed by the market. 

Funding Strategy Principles

NZDM’s primary objective is to minimise the Crown’s borrowing costs over the long-term with due consideration to risk, while ensuring a well-functioning market for New Zealand Government securities (NZGS).

For the NZGB market, meeting this objective is currently best achieved by taking a strategic, rather than short-term tactical approach to funding activities. NZDM aims to smooth the Crown’s borrowing through time to reduce the variability in annual programmes which could impact market function.

Delivery of funding activity is underpinned by the core principles of transparency, consistency and even-handedness, and future actions are communicated in a timely manner.

The funding strategy aims to balance three key goals:

• Considering the overall structure of the Crown’s balance sheet.
• Capturing and stimulating investor demand.
• Promoting well-functioning and liquid NZGS markets.

In addition to managing regular cash flow requirements, NZDM holds a buffer of NZ$15 billion of cash and liquid, high-quality financial assets through time. This ensures that the Crown can respond to unexpected fiscal shocks or disruptions in funding markets. Forecast core Crown borrowing programmes are set with this minimum in mind.

Wholesale Funding Strategy 2024/25

Term Funding

NZGB portfolio 30 November 2024

Source: The Treasury

Gross issuance for 2024/25 is set at NZ$40 billion, up from NZ$38 billion forecast at the 2024 BEFU. Of the NZ$40 billion, IIB issuance is expected to be less than NZ$1 billion in 2024/25.

Two additional tap syndications are expected to be executed in the second half of the fiscal year, subject to market conditions.  The first is expected to be a tap syndication of the existing 2035 nominal bond in the March 2025 quarter, while the details for the second will be announced in subsequent updates.

Issuance of existing NZGBs will primarily take place via weekly tenders spread across multiple maturities to cater to a range of investor demand. NZGBs are not issued via private placements, which is considered inconsistent with NZDM’s core principles of transparency, consistency, and even-handedness.

Only Primary Dealers (PDs) are able to participate in tenders and eligible for syndicate panels. To qualify as a PD, an intermediary must play a significant role in intermediation of NZGS to investors, as well as commit to supporting secondary market liquidity and price transparency.

Nominal Bonds

Nominal bonds are the primary funding instrument. The individual nominal bond line capacity limit is NZ$25 billion which balances the need to promote liquidity in each security, while managing the size of maturity cash flows and refinancing risk.

The NZGB nominal portfolio is constructed to:

• Accommodate demand at different points on the curve which contributes to a diversified investor base.
• Target tender issuance into the 5-year, 10-­year, and 30-year benchmark securities.
• Aim to build new bond lines quickly to at least NZ$4 billion.
• Ensure regular spacing between bond lines across the yield curve. Out to 10-years, spaces between lines is one-year. For longer tenors, the spacing between maturities increases, which is conditional on future funding requirements. 

Monthly tender schedules outline the total weekly issuance volume, as well as a range of issuance per section of the curve, providing market participants with early visibility of these parameters. Specific bond lines and volume per line is announced on the first business day of the week of the tender. In refining these final tender details, NZDM considers market dynamics and structured feedback from PDs alongside NZDM’s portfolio preferences.

Green Bonds

Green Bonds, which are nominal bonds issued under the Green Bond framework, are expected to be an enduring part of the NZGB portfolio. Green Bonds will help ensure high quality Government projects with robust environmental outcomes are financed, delivered, monitored and reported on.

The Green Bond framework was published in September 2022. Eligible Green Expenditure is updated and published on the NZDM website on a regular basis, following approval from the Green Bond Committee. The first New Zealand sovereign Green Bond, the 2034 nominal Green Bond, was launched via syndication in November 2022. It has subsequently been issued as part of the nominal bond tender schedule.

From a portfolio construction perspective, Green Bonds will be treated similarly to conventional nominal bonds. They form part of the nominal bond curve and are expected to have different maturity years to conventional nominal bonds.

Green Bonds form an enduring part of the Crown’s borrowing programme. Consequently, more than one green bond line can be expected over time, although the focus in the first instance is bringing the inaugural green line up to sufficient volume to support market liquidity. 

The first annual Impact and Allocation Report for the New Zealand Sovereign Green Bond Programme was published in December 2024. The Impact and Allocation report provides an overview of the Green Categories and expenditures to which net Green Bond proceeds were allocated and the impacts of our programme, for the period to 30 June 2024.

Inflation-Indexed Bonds (IIBs)

Proportion and annual gross issuance of IIBs

Source: The Treasury

Although the proportion of IIBs in the NZGB portfolio has decreased from a peak of 24% in 2019 to around 10% currently, IIBs continue to be a core product alongside nominal bonds. IIBs contribute to investor diversification and inflation adjusted coupon and principal amounts align repayments with the variability in Crown revenues thus reducing the risk on the Crown’s balance sheet.

A flexible approach to IIB issuance is taken to assist with market functioning. IIBs can be offered at tenders on the same dates as nominal bond tenders, subject to demand indicated by market participants. NZDM see a bond with close to a 10-year maturity as an important reference point on the IIB curve and expect to maintain this benchmark line. However, to satisfy demand from some IIB investors with demand for duration, we also intend to continue to issue and maintain longer-dated IIBs lines. For more detail on our IIB strategy, see the NZDM Insights – Supporting the New Zealand Inflation Indexed Bond Market.

Euro Medium Term Note (EMTN)

NZDM has documentation in place to issue long dated foreign currency debt under an EMTN programme. However, this facility has not been used since 2004, given objectives to support NZD securities markets. While there are no current plans to issue under an EMTN programme, NZDM's funding strategy is continually under review. 

Average maturity

Average weighted term to maturity of NZGB portfolio

Sources: The Treasury, RBNZ

The average weighted term to maturity of the bond portfolio has increased consistently over the past decade. Several factors have been considered in this decision:

• Investor diversification, including capturing demand from investors seeking duration or aiming to offset long-dated liabilities.
• Reducing refinancing risk.
• Contributing to the development of New Zealand’s capital markets by extending the risk-free curve and re-launching the IIB programme in 2012.

Subsequently, the average weighted maturity has stabilised around 7.5 years. There are no plans to extend the NZGB curve beyond the 30-year point. With regular issuance into tenors across the curve, the average weighted term to maturity is expected to stabilise around current levels.

Secondary market support

Maximising liquidity in the secondary market for NZGS remains a priority. Strong relationships with intermediaries that support the NZGS markets are crucial to achieving this outcome. The funding strategy also incorporates elements to help maximise secondary market liquidity:

• Focusing on core NZD denominated instruments. This helps to maximise liquidity in existing NZGS, and a well-developed NZD denominated NZGS market supports domestic capital markets.
• Syndication issuances to launch new bond lines and issue large volumes. Syndicated issuance ensures a sizable volume of a bond line is on issue from initiation. After an initial blackout period of typically at least two months, tender issuance into the bond line commences which helps promote liquidity in the new bond line. Syndications are also utilised to tap existing bond lines when a large issuance volume is sought.
• Undertaking bond buybacks. Approximately 18 months prior to a bond maturity, NZDM starts assessing the benefit of offering to repurchase it early.  Early repurchase may assist to smooth Crown cash flows and enable investors to recycle proceeds further out the yield curve, but will not always be viable due to portfolio requirements and market conditions. 
• Broadly matching ACGB maturities. NZDM aims to issue NZGBs with maturities that closely align with Australian Commonwealth Government Bond (ACGB) equivalents to enable investors to easily assess relative value and trade between these assets, helping support secondary market liquidity.

Short-term Borrowings

Short-term borrowings, history and forecast

Sources: The Treasury

Short-term borrowings provide flexibility to address short-term cash needs which may arise from upcoming bond maturities, or seasonal or unexpected changes in cash flows. They also provide ongoing core funding.

At the end of the 2024/25 fiscal year, short-term borrowings are expected to be NZ$20 billion, NZ$7 billion higher than previously forecast. This temporary increase in short-term borrowings allows us to keep annual NZGB issuance relatively steady over the forecast period. Subject to minimum volumes of ECP and T-Bills (see below), the balance will be a mix between ECP and T-Bills, depending on market dynamics and relative pricing.

Intra-year total short-term borrowings are expected to vary from NZ$10 billion to NZ$25 billion, based on realised short-term cash needs. For more detail on our short-term borrowings, see the NZDM Insights – NZDM’s short-term borrowing strategy.

Treasury Bills (T-Bills)

Short-term borrowing incorporates a core issuance assumption of at least NZ$3 billion of T-Bills to retain market presence and function. T-Bills are made available through weekly tenders.

Euro-Commercial Paper (ECP)

ECP issuance was restarted in April 2020, with ECP on issue having generally ranged from NZ$1 to NZ$2 billion until June 2023. However, there are benefits in maintaining a higher volume of ECP on issue. A larger ECP programme supports NZDM's investor diversification objectives as ECP typically attracts a different investor base than NZD NZGS. In addition, at times, ECP can be more cost effective to issue than alternative short-term instruments. A minimum of US$3 billion equivalent of ECP will be maintained.

Current market dynamics, including higher T-bill yields relative to ECP, suggests most of the increase in short-term issuance is likely to be via ECP issuance in the near-term.

The Crown’s programme operates through a closed dealer group. Consequently, any issuance to end investors can only be distributed by those banks named on the programme. ECP is issued by reverse enquiry with NZDM setting pricing levels to the ECP programme dealers daily.

Investor Engagement

The funding strategy aims to stimulate demand from different investor types, whether by geography, style or mandate. NZDM has a structured investor engagement programme which includes Investor Update and NZDM Insights publications, along with regular meetings and presentations to investors.

As at end-October 2024, non-residents held NZ$100 billion of NZGBs, representing 62% of the market free float[1], an increase of NZ$22 billion on 12 months ago. For many investors, NZGBs are an ‘off-benchmark’ position, highlighting the importance of stimulating foreign investor interest and demand alongside that of domestic financial institutions.

Syndication statistics provide insights into the investor base and reveals demand to be well-diversified across investor types and geographies. The data available on the NZDM website aggregates syndication statistics since the 2020 calendar year. NZGB secondary market turnover data from PDs is also available on the website.

Stimulating a broad range of investor groups is a core objective of the engagement programme. The 2051 nominal bond syndication saw several new investors participating, as did the syndication of the inaugural Green Bond. In addition, the inclusion of NZGBs into the FTSE Russell World Government Bond Index, in November 2022, likely contributed to new investors participating in our market.

Syndication allocation by region and term

Source: The Treasury

Syndication allocation by investor type and term

Source: The Treasury