First sale of inflation-indexed bonds since 1999 draws $4b of bids

BUSINESSDESK: The New Zealand Debt Management Office sold $2.5 billion of inflation-indexed bonds in the first auction of the securities since 1999.

The debt matures in 2025 and was overbid, attracting more than $4 billion in demand, and sold at a real yield of 1.96%, the DMO says in a statement. The notes carry a coupon of 2%.

The sale amounts to more than half the $4 billion inflation-linked debt programme flagged for the 2013 and 2014 fiscal years. The DMO says it plans to embark on a primary issuance tender programme from February next year.

"The strong demand for the inflation bonds is a vote of confidence in New Zealand at a time when many other countries are dealing with deep-seated economic and financial problems," Finance Minister Bill English says.

"This will help us to continue borrowing at competitive market interest rates, so that we might minimise the government's borrowing costs at a time when its finances are tight."

The office first sold inflation-indexed bonds in 1995 maturing in 2016 and paying annual interest of 4.5%. The debt had an indexation value of $2.05 billion, or 3.3%, of the government's total debt outstanding as at September 30, according to DMO figures.

Last month the DMO said it would sell inflation-linked debt from this month depending on market conditions, having signalled it would resume selling the notes in 2010.

Relaunching the securities was a recommendation of the 2009 Rob Cameron-led Capital Markets Development Taskforce report into how to build the nation's capital markets to help improve investor access to the government's debt programme.

DMO treasurer Brendon Doyle says he expects inflation-indexed bonds will become a core part of the government's funding programme as the market grows.

New Zealand's consumer price index rose 0.3% in the three months ended September 30, Statistics New Zealand says, slower than the 0.5% forecast by the central bank.

The annual pace of inflation slowed to 0.8%, below the 1% forecast by the Reserve Bank and outside its target band of between 1% and 3%.

The bond was issued via syndication and the sale was managed by ANZ, Deutsche Bank and UBS. HSBC and the Royal Bank of Scotland were co-managers.