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2023/24 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 2023/24 fiscal year, issuance will be across multiple points on the curve, with a focus on building up benchmark bond lines. A more flexible nominal bond tender approach was introduced in July 2023. Two new nominal bond lines are expected to be launched, via syndication, before the end of the fiscal year. The maturities of the bond lines will be 15 May 2035 and 15 May 2054.
- Green Bonds: The inaugural Green Bond was issued in November 2022. 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 2024, short-term borrowings are expected to be NZ$9 billion. The split between short-term instruments will be a function of market demand and pricing dynamics.
- Treasury Bills (T-Bills): T-Bills are issued via weekly tenders. A minimum of NZ$2 billion of T‑Bills on issue will be maintained.
- Euro-Commercial Paper (ECP): ECP is short-term foreign currency issuance. A minimum of US$1 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.
At the September 2023 Pre-Election Economic and Fiscal Update (PREFU), the forecast New Zealand Government Bond (NZGB) programme for 2023/24 was increased to NZ$36 billion, NZ$2 billion higher than forecast at the Budget Economic and Fiscal Update (BEFU) in May 2023. Over the full forecast period, NZGB borrowing programmes were increased by a total of NZ$9 billion.
|Year ending 30 June (Face Value)||2024||2025||2026||2027||Total|
|Gross NZGB issuance (NZ$ billions)||36||35||30||28||129|
|NZGB maturities and repurchases (NZ$ billions)||18.8||19.9||18.2||22.9||79.7|
|Net NZGB issuance (NZ$ billions)||17.2||15.2||11.8||5.1||49.3|
|NZGBs outstanding (NZ$ billions)||169.6||184.8||196.6||201.7||n/a|
|NZGBs outstanding (% of GDP)||41%||42%||42%||41%||n/a|
|Forecast short-term borrowings (NZ$ billion)||9||9||9||9||n/a|
Of the NZ$129 billion gross borrowing programme over the four-year forecast period, NZ$80 billion is to refinance maturities and repurchases, while a further NZ$17.5 billion is to finance loans from NZDM to Kāinga Ora. In addition, due to sales from the Reserve Bank of New Zealand of NZGBs held under the Large-Scale Asset Purchase programme, gross issuance and repurchases are both higher by NZ$20 billion.
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 2023/24
NZGB portfolio 31 August 2023
Source: The Treasury
Gross issuance for 2023/24 is set at NZ$36 billion, up from NZ$34 billion forecast at the 2023 BEFU. Of the NZ$36 billion, IIB issuance is expected to be less than NZ$1 billion in 2023/24.
Two new nominal bond lines are expected to be introduced, via syndication, before the end of the fiscal year. The maturity dates of the bond lines will be 15 May 2035 and 15 May 2054.
Issuance of existing NZGBs will 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 Registered Tender Counterparties (RTC) are able to participate in tenders and eligible for syndicate panels. To qualify as an RTC, 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 are the primary funding instrument. Nominal bond line capacity limit is NZ$18 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.
The upcoming month’s tender schedule outlines 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 last business day the week prior to tenders in the following week. In refining these final tender details NZDM takes into account market dynamics and structured feedback from RTCs alongside NZDM’s portfolio preferences.
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 will be 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 and have individual line capacity limits of NZ$18 billion. New Green Bond lines will be launched via syndication, in volumes consistent with conventional nominal bonds. Following the typical two-to-three-month blackout window, Green Bonds will be tendered into across their lifetime, with a focus on bringing volumes up to NZ$4 billion quickly. As with nominal bonds, issuance into the bonds will likely be higher than otherwise when the line is a ‘benchmark’ tenor. Green Bonds will form part of the nominal bond curve and are expected to have different maturity years to nominal bonds.
Green Bonds will 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.
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 12% 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 up to twice a month, subject to demand indicated by market participants in terms of volumes and lines. 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 issue longer-dated IIBs in the future. 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 maintains up-to-date legal documentation for an EMTN programme, should this be required. However, this facility has not been used since 2004 and there is no current intention to undertake long-dated foreign currency issuance, given objectives to support NZD securities markets. In addition, market pricing, relative to NZD securities, is also not currently favourable.
Average weighted term to maturity of NZGB portfolio
Source: The Treasury
The average weighted term to maturity of the bond portfolio has increased consistently over recent years. 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.
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 can also be utilised to tap existing bond lines when a large issuance volume is sought.
- Undertaking bond buybacks. NZDM generally repurchases bonds prior to maturity to smooth Crown cash flows. This also enables investors to recycle proceeds further out the yield curve.
- 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, history and forecast
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 2023/24 fiscal year, short-term borrowings are expected to be NZ$9 billion. While NZ$9 billion is higher than previous years, the proportion of short-term borrowings in the NZGS portfolio will be similar to prior to the COVID-19 pandemic. 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 is expected to vary from NZ$6 billion to NZ$15 billion, based on realised short-term cash needs.
Treasury Bills (T-Bills)
Short-term borrowing incorporates a core issuance assumption of at least NZ$2 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. However, we see benefits in maintaining a higher volume of ECP on issue. A larger ECP programme should support our 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$1 billion of ECP will be maintained.
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.
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 Investor Insights publications, along with regular meetings and presentations to investors.
As at end-August 2023, non-residents held NZ$76 billion of NZGBs, representing 62% of the market free float, an increase of NZ$18 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 RTCs 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
- Outstanding bonds less RBNZ large scale asset purchases.