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New Zealand Government Securities Funding Strategy

New Zealand Government Securities Funding Strategy - Edition 2 2020/21

Issue date: 
Thursday, 18 February 2021

2020/21 Funding Strategy - at a glance

The Treasury's New Zealand Debt Management function has the objective of minimising the Crown’s borrowing costs over the long-term with due consideration to risk, while ensuring ongoing access to debt funding markets.

Snapshot:

  • Monthly tender schedules announced in advance, with multiple bonds offered per weekly tender.
  • Nominal bonds remain the primary funding vehicle. Forecast inflation-indexed bonds issuance of NZ$1 billion.
  • Syndications remain the preferred method for the issuance of new bond lines.
  • One additional nominal NZGB is expected to be launched, via syndication, before 30 June 2021.
  • Enhanced communication channels to support continued focus on diversification of the investor base.

New Zealand Debt Management (NZDM) is a function within the Treasury[1] and is responsible for managing the Crown's[2] net cash flows and liquidity position. This document covers recent developments in the New Zealand Government Securities (NZGS) Market and updates NZDM's Funding Strategy for the 2020/21 year.

Notes

  1. [1] The Treasury is the Government's lead economic and financial adviser. The Treasury provide advice to the Government on its overarching economic framework, on its fiscal strategy and on achieving value for money from its investments.
  2. [2] The Crown is the Head of State of New Zealand. New Zealand Government Securities are issued in the name of “Her Majesty the Queen in right of New Zealand”.

Preface

Welcome to the second edition of the New Zealand Government Securities (NZGS) Funding Strategy for 2020/21. COVID-19 continues to impact the Crown's fiscal outlook. However, since the last edition was published in July 2020, the forecast core Crown borrowing programme has been revised down. This reflects a less severe impact of COVID-19 on economic activity than anticipated and a faster than expected recovery.

Key elements of the 2020/21 Funding Strategy remain unchanged from the Budget Economic and Fiscal Update (BEFU) 2020. Nominal bonds will continue to be the primary funding vehicle, although Inflation-Indexed Bonds (IIBs) remain an important part of the funding portfolio. NZDM has maintained flexibility in Treasury Bill (T-Bill) issuance so that short-term liquidity requirements can be met in an efficient manner. This approach is augmented by a European Commercial Paper (ECP) issuance programme.

Issuance into existing New Zealand Government Bond (NZGB) lines will primarily occur via regular tenders, with multiple bonds offered across the curve at each weekly auction. Syndications remain the preferred method for the issuance of new bond lines, as it enables the placement of a large initial volume into the market, promoting immediate liquidity in the new bond. Tap syndications have also been used to add sizable volume to existing bond lines.

To support the secondary market, NZDM prioritise issuing into core instruments in New Zealand Dollars (NZD), issuing new bonds via syndication, undertaking bond buybacks of upcoming maturities, and broadly matching NZGB issuance maturities to Australian Commonwealth Government Bonds (ACGB).

NZDM's proactive investor engagement strategy helps maintain a diverse global investor base. The results can be seen in data showing holdings of NZGBs and recent syndication allocations.

Recent Developments

While COVID-19 remains prevalent across the globe, in New Zealand, it is now largely confined to managed isolation facilities with no widespread outbreaks detected for a number of months. The economic impact of COVID-19 continues to weigh on the Crown's fiscal outlook. However, since the last Funding Strategy publication in July 2020, the forecast NZGB borrowing programme has been revised down, reflecting an improved outlook for the Crown fiscal position. This revision is primarily linked to a less severe impact from COVID-19 on economic activity and a faster recovery than previously expected. Alongside the release of the Half Year Economic and Fiscal Update (HYEFU) on 16 December 2020, forecast total NZGB issuance across the years from 2020/21 to 2023/24 was reduced. Forecasts across these years are now NZ$30 billion lower, in total, than published on 14 May 2020 at BEFU[3].

Note

  1. [3] Due to 2020 being an election year, the Pre-election Economic and Fiscal Update (PREFU) was published in September 2020, which was the latest update to the borrowing programme prior to HYEFU 2020. However, this document will mostly point to BEFU 2020 data, as a point of reference, due to its inclusion in the last edition of the NZGS Funding Strategy.

Funding the Crown

The Treasury's forecasts at HYEFU 2020 show an improvement in the Crown's fiscal position, relative to that forecast at BEFU 2020. However, between fiscal years 2020/21 and 2023/24, a cash shortfall of NZ$105.7 billion is still expected. The core Crown cash shortfall (‘residual cash deficit') is funded largely through borrowing via the NZGS market. Changes to core Crown cash is the key driver of changes to the core Crown borrowing programme. However, NZDM also consider liquidity requirements and the size of the cash buffer, when compiling forecasts.

NZGS forecasts as published at HYEFU 2020
Year ending 30 June (face value, NZ$ billion) 2021 2022 2023 2024 2025 Total
Gross NZG issuance (NZ$ billion) 45 30 30 30 25 160
Forecast T-Bills on issue (NZ$ billion) 8 6 6 6 6 n/a
Change in NZGB issuance (relative to BEFU 2020) -15 -10 -5 0 n/a n/a
Change in T-Bills on issue (relative to BEFU 2020) -2 -4 -4 -4 n/a n/a

Source: The Treasury

The core Crown borrowing programme includes the issuance of both NZGBs which include nominal bonds and IIBs, and short-term borrowings such as T-Bills and ECP. Together, these make up NZGS. Consistent with the profile of the core Crown cash shortfall, net NZGB issuance is highest in the first year of the forecast period. As a result of variability in economic activity due to COVID-19, heightened uncertainty remains on the timing, and to a lesser extent the size, of cash requirements. To mitigate this uncertainty, NZDM have maintained a sizeable cash buffer in each of the forecast years, at a level which is broadly unchanged from BEFU 2020. This allows the Government to be better placed to manage funding and liquidity risks.

In 2020/21, gross issuance of NZGBs is forecast to be NZ$45 billion. When bond maturities and bond buybacks are taken into account, net issuance is expected to be NZ$33.9 billion. As a proportion of GDP, NZGBs on issue are forecast to rise from 30 per cent in the year ended 30 June 2020, to 49 per cent in the year ended 30 June 2025. Funding requirements will be revisited ahead of the May 2021 BEFU.

Forecast NZGB issuance

Source: The Treasury

Funding Strategy principles and objectives

NZDM's Funding Strategy is based on the principles of transparency, consistency and even-handedness. The core objective of the Funding Strategy 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.

The Funding Strategy is aimed at balancing three key goals; consideration of the overall structure of the Crown's balance sheet, the ability to capture and stimulate investor demand, as well as promoting well-functioning and liquid NZGS markets.

For the NZGB market, this objective is achieved by taking a structured, long-term approach, rather than a short-term tactical approach to funding activities. This supports the overall aim of reducing uncertainty or illiquidity premiums associated with NZGBs, by clearly communicating future actions in advance.

Wholesale Funding Strategy 2020/21[4]

Funding instruments

The following chart indicates the proportions of the funding instruments within the overall portfolio.

Current New Zealand Government Securities portfolio[5]

Source: The Treasury

Nominal bonds remain the primary funding vehicle and are forecast to constitute around NZ$44 billion of the 2020/21 NZGB programme.

Nominal bond lines are capped at NZ$18 billion. This level allows for the need to promote liquidity in each bond line, while managing the size of maturity cash flows and mitigating refinancing risk. However, the full capacity of any bond line may not be utilised.

The current structure of the NZGB portfolio allows for in-fill bond maturities to be introduced within the current NZGB curve or for extension of the curve.

NZGB portfolio[6]

Source: The Treasury

Inflation-indexed bonds (IIBs) remain an important part of the core Crown borrowing programme. IIBs support diversification of the investor base and enable a portion of interest expenses to be correlated with the economic cycle and thereby fiscal revenues.

IIBs constitute a solid proportion of the total NZGS portfolio, at 14 per cent. This proportion has reduced over the past year, from a peak of 23 per cent in mid-2019, as the Funding Strategy has focused increased NZGB issuance in the nominal product. This approach reflects market feedback and the relative cost of issuance. The appropriate proportion of IIBs within the portfolio, and the appropriate rate of issuance, is assessed on an ongoing basis. However, commitment to the IIB product as part of the portfolio remains constant.

Individual IIB lines remain capped at NZ$6 billion face value. It is expected that there will be approximately NZ$1 billion of IIB issuance in 2020/21, subject to market conditions.

Treasury Bills (T-Bills) provide flexibility to address short-term cash needs which may arise as a result of upcoming bond maturities, or unexpected changes in cash flows. T-Bills are made available through weekly tenders.

T-Bills on issue are forecast to be NZ$8 billion at 30 June 2021. This is NZ$2 billion lower than previously forecast at BEFU, reducing short-term refinancing risk and reflecting a lower overall funding task. However, the level is higher than prior to COVID-19, in line with the overall increase in core Crown borrowing. The actual volume of T-Bills on issue may vary from forecast, based on factors such as the relative cost of T-Bill issuance versus alternative short-term funding mechanisms and actual short-term cash needs.

European Commercial Paper (ECP)[7] issuance was restarted in April 2020 and there is currently around NZ$2.0 billion on issue (as at 31 January 2021). NZDM intend to maintain a small volume of ECP on issue.

Alternative funding mechanisms are available to NZDM, which further help to meet any short-term cash needs of the Crown, if, and when, they arise. These include a limited overdraft facility with the Central Bank, the Reserve Bank of New Zealand (RBNZ). NZDM also maintain up-to-date legal documentation[8] programme, should this be required.

NZD NZGS on issue[6]

Source: The Treasury

Primary Issuance

Tender issuance. Issuance into existing NZGBs will primarily occur via regular tenders. Details of the upcoming month's tender schedule are published in advance to provide market participants with as much certainty as possible regarding issuance plans, while maintaining some flexibility to adjust the issuance profile throughout the year. At each weekly tender, multiple NZGBs are offered. Tender schedules are announced at the set time of 8am (NZT) on the day prior to the last tender of the previous month.

During the month of February 2020, a total of seven different NZGB lines will be offered through weekly tenders. Weekly tender volumes will be approximately NZ$450 million. This profile is designed to provide liquidity and price transparency at different maturities across the curve, to appeal to a wide range of investors.

NZDM constantly review the optimal number of bonds offered per tender, given the overall weekly issuance volume.

T-Bill tenders also take place on a weekly basis. The volumes offered across the 3, 6 and 12 month lines are based on funding requirements and are announced on the day prior to the tender. The amount issued will depend on an assessment of bids received relative to other short-term funding mechanisms, subject to the operating rules and guidelines.

Only Registered Tender Counterparties (RTC) may participate in tenders. To qualify as an RTC, an intermediary must play a significant role in intermediation of NZGS products to investors, as well as commit to supporting secondary market liquidity and price transparency. An RTC must also support the primary market through regular participation in NZGS tenders.

RTCs are listed on the New Zealand Debt Management website to create visibility for investors. Only RTCs are eligible for syndication issuance panels.

Syndicated issuance. Syndications remain the preferred method for the issuance of new bond lines, as it enables the placement of a large initial volume into the market, promoting immediate liquidity in the new bond. Recently, tap syndications have also been used to add sizable volume to existing bond lines. The frequency of syndications has increased over the past year in response to the increased funding requirement.

Syndication intentions are generally announced alongside an Economic and Fiscal Update, with further details typically provided alongside monthly tender schedule announcements. Further operational announcements are made subsequently, which specify the appointment of any syndication panel and launch of the transaction.

The decision on whether to launch a new bond line depends on multiple factors, including the NZGB portfolio structure, investor demand, individual line sizes and remaining capacity, the size of the annual core Crown borrowing programme, and market conditions.

As announced at HYEFU, one additional nominal NZGB is expected to be launched, via syndication, before 30 June 2021. The maturity, which is expected to be longer-dated than the recently launched 15 May 2026 NZGB, will be confirmed ahead of syndication.

History of syndication volumes

Source: The Treasury

ECP issuance. Consistent with nearly all other ECP programmes, the Crown's programme operates through a closed dealer group. This means any ECP issued to investors can only be distributed by those banks named on the programme. ECP is issued by reverse enquiry whereby NZDM post price levels to ECP programme dealers on a daily basis.

Private placements. The NZDM Funding Strategy does not include the use of private placements. This activity is considered to be inconsistent with the core principles of transparency, consistency and even-handedness. Priority is also given to maintaining liquidity in core market-traded instruments.

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. In addition, the Funding Strategy also incorporates elements to help maximise liquidity.

Focusing on core instruments issued in NZD. NZDM focus on New Zealand Dollar (NZD) denominated issuance in the domestic market. This helps to maximise liquidity in existing NZGS, and a well-developed NZD denominated NZGS market supports domestic capital markets.

Issuing new bond lines via syndication. Syndicated issuance ensures a sizable volume of a bond line is on issue from initiation. After a blackout period of typically at least two months, tender issuance into the bond then commences which helps promote liquidity in the new bond line.

Undertaking bond buybacks. The Funding Strategy generally incorporates a policy of buying back bonds prior to maturity. This helps to smooth cash flows around bond maturities, and to enable the recycling of maturity proceeds to investment further out the NZGS curve.

It has been recent practice to buyback outstanding bonds within an 18 month window before a bond matures. The RBNZ typically assumes responsibility for buyback activities during the final six month period before a bond matures, in an effort to ensure overall financial system liquidity.

In the case of the 15 May 2021 NZGB, the RBNZ started repurchases in March 2020 for liquidity management purposes and to support market functioning. Consequently, NZDM do not intend to undertake repurchases of the 15 May 2021 NZGB.

Broadly matching ACGB maturities. NZDM aim to issue NZGBs with maturities that closely align with Australian Commonwealth Government Bond (ACGB) equivalents to enable investors to easily assess relative value between these assets.

Average maturity

Over a number of years, the Funding Strategy has looked to extend the average weighted maturity of the NZGB portfolio. The average weighted maturity of the NZGB portfolio has increased from approximately 4.5 years in mid-2009 to around 7.6 years currently.

Average weighted maturity of NZGB portfolio

Source: The Treasury

Increasing the average weighted maturity has contributed to meeting several objectives. It has improved the Crown’s asset-liability matching, taking into account the interest rate sensitivity of the Crown’s long-dated assets. It has supported investor diversification by capturing demand from investors with long-dated liabilities. It has also helped reduce refinancing risk and frequency, as well as contributing to the development of New Zealand’s capital markets overall. Over the long-term, there is no specific target for the average weighted maturity of the portfolio. Broadly, NZDM continue to see benefits in increasing the average weighted maturity of the bond portfolio, however, issuance decisions will also be influenced by an assessment of investor demand and market conditions.

Environmental, Social and Governance (ESG) considerations

On various independent sustainability and Environmental, Social and Governance (ESG) metrics, New Zealand is one of the most highly rated sovereigns in the world. This includes a 2020 Sustainable Development Goals (SDG) global rank of 16 out of 166 countries.

The New Zealand Government also has clearly stated wellbeing objectives. The first ‘Wellbeing Budget' was delivered in 2019 and included a package of initiatives to measure progress focused around five Budget Priorities[9]. Included in the Wellbeing Budget initiatives was the creation of an independent Climate Change Commission to advise on carbon reduction techniques and setting a provisional emissions target and revised cap and price controls for the Emissions Trading Scheme.

In Budget 2020 however, a number of the new initiatives under the Budget Priorities were postponed in order to fund the targeted, primarily socially-focused, COVID-19 response and recovery measures. That said, the aim of the measures remain prioritising the wellbeing of current and future generations of New Zealanders. In June 2020, an amendment to the Public Finance Act introduced new requirements for the Government to report annually on its Wellbeing Objectives in the Budget, and for the Treasury to report periodically on the state of wellbeing in New Zealand.

In January 2021, the New Zealand Climate Commission laid out draft advice to the Government on the steps New Zealand can take to reduce greenhouse gas emissions and address climate change. The Commission's advice includes:

  • The proposed first three emissions budgets for New Zealand.
  • Recommendations on the direction of the country's first emissions reduction plan, which provides policy guidance to Government on how the emissions budgets could be met.

The advice is open for consultation until 14 March 2021. The final advice will be released before 31 May 2021. Once the final advice has been received, the Government will respond with an Emissions Reduction Plan before the end of the year, which will set out how the first three emissions budgets will be achieved.

NZDM are cognizant of the contribution an efficient, holistic and well managed debt funding strategy can make in supporting the Government to achieve its broad ESG objectives. In this context, NZDM have no imminent plans to issue debt in a specific ESG format.

Diversifying investor base

Maintaining an investor base which is diverse by geography, investor type and mandate is achieved through an active investor engagement strategy.

The proportion of NZGBs held by non-residents has recently stabilised at around 50 per cent. At 31 December 2020, the proportion of nominal bonds held by non-residents remains higher, at 53.8 per cent, compared to 34.9 per cent for IIBs. These figures exclude the bonds purchased as part of the RBNZ's Large Scale Asset Purchase program. Non-residents held approximately NZ$39 billion of NZGBs, which is largely unchanged from a year ago.

Non-resident holdings of NZGBs[10]

Source: RBNZ

The diverse investor base is also reflected in the syndication statistics which are published on the NZDM website. The allocation statistics are grouped by Location and Investor Type, and cover transactions that have occurred since the start of the 2020 calendar year. The charts below illustrate how investor participation in syndications varies dependent on the maturity of the bond issued. Participation in shorter-dated bonds tends to be higher from domestic investors while offshore investors are better represented in longer-dated syndications.

As part of the investor engagement strategy, NZDM undertake frequent interactions with the investor base. This includes publication of a monthly Investor Update and a regular meeting and presentation schedule. In the current environment, NZDM have adapted the strategy to incorporate virtual platforms. More detail on all media and external publications can be found at https://debtmanagement.treasury.govt.nz/investor-resources.

Recent Nominal Bond Syndication Allocations Snapshot - Investor Proportions by Location

Source: The Treasury

Notes

  1. [4] Wholesale debt accounts for over 99 per cent of New Zealand Government Securities on issue, with retail debt (Kiwi Bonds) making up the remainder.
  2. [5] As at 31 January 2021.
  3. [6] As at 10 February 2021.
  4. [7] ECP is an unsecured, short-term debt instrument that is typically denominated in a currency differing from the domestic currency of the market where it is issued.
  5. [8] Euro Medium Term Note is a medium-term debt instrument that is denominated in a currency differing from the domestic currency of the market where it is issued.
  6. [9] Mental health, child wellbeing, supporting Māori and Pasifika aspirations, building a productive nation, transforming the economy.
  7. [10] As at 31 December 2020.
Last updated: 
Tuesday, 16 March 2021