New long term bonds a taste of things to come

The 12-year bond being launched on Thursday’s bond tender is a new departure for New Zealand governments – and New Zealand investors.

More along these lines is indicated for release in Finance Minister Bill English’s May 28 Budget.

As NBR reported two weeks, ago, the government is looking at “more sophisticated ways” of raising funds for infrastructure projects, both by central and local government.

Mr English described it as a longer-term project because officials concerned with this area are currently so busy on raising more conventional government debt.

But the job is getting harder.

The visiting chairman of Magellan Financial Group Hamish Douglass told a forum of investment advisers in Wellington this week that interest rates are going to rise regardless of what central banks or governments do.

Governments are still raising money by borrowing and will be competing with each other as well in a recovering global equity market.

“When markets start to recover people are not going to be happy on an effective interest rate of half a percent, Or even 2-3%,” he said.

“Irrespective of inflation, I think interest rates will be materially higher then they are at the moment … anyone locking themselves into long term fixed interest right now is absolutely crazy.”

That move from safe, low paying debt instruments into higher yielding investments will mean governments like New Zealand will have to offer a higher return – and one way of doing that will be with the sort of instruments Mr English has been talking about.

Such longer-term instruments will also be used for local government infrastructure projects as well as central government works.

In announcing the tender Mr English said the government is also looking at a longer dated bond, with maturity longer than 15 years.

“Other countries have been using such longer dated instruments for years.”

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