Back
19 Feb 2014
Flash: Sharp flow reversal in NZ Government Bonds - Westpac
FXStreet (Bali) - As Imre Speizer, FX Strategist at Westpac, notes, investors were net sellers of NZGB (New Zealand Government Bonds) in January, mainly due to the RBNZ’s looming tightening cycle.
Key Quotes
"January witnessed the heaviest net selling of NZGB’s since 2009, according to both our own client flow data and the RBNZ’s official data for offshore ownership of NZGB’s. We ignore the selling in April 2013 and November 2011 since they captured large bond maturities during those months. An examination of the detail in our own data flow model reveals both onshore and offshore investors were sellers, and among the latter real money non-sovereign types were dominant."
"In an attempt to explain the sharp flow reversal, we cite a number of factors. First, the RBNZ is widely expected to start raising its policy interest rate in March, a deterrent for some bond investors. Second, a climate of global risk aversion prevailed during the second half of January, possibly motivating global flows towards safe-havens such as US treasuries. Third, and partly related to the second point, the NZD/USD exchange rate fell by around 5%, affecting total NZGB returns for offshore investors. Indeed, there is some relationship between the exchange rate and NZGB flows from offshore over the medium term (Chart 1b). Finally, January is seasonally the slowest month for NZGB buying."
"Looking ahead, one factor which should persist for some time will be the RBNZ’s tightening cycle. Investors are likely to significantly increase NZGB exposures once they perceive term interest rates have fully priced the whole cycle (including an allowance for an overshoot) but we don’t expect that to occur until the RBNZ has hiked a number of times. In the meantime, further selling pressure could push swap spreads even lower."
Key Quotes
"January witnessed the heaviest net selling of NZGB’s since 2009, according to both our own client flow data and the RBNZ’s official data for offshore ownership of NZGB’s. We ignore the selling in April 2013 and November 2011 since they captured large bond maturities during those months. An examination of the detail in our own data flow model reveals both onshore and offshore investors were sellers, and among the latter real money non-sovereign types were dominant."
"In an attempt to explain the sharp flow reversal, we cite a number of factors. First, the RBNZ is widely expected to start raising its policy interest rate in March, a deterrent for some bond investors. Second, a climate of global risk aversion prevailed during the second half of January, possibly motivating global flows towards safe-havens such as US treasuries. Third, and partly related to the second point, the NZD/USD exchange rate fell by around 5%, affecting total NZGB returns for offshore investors. Indeed, there is some relationship between the exchange rate and NZGB flows from offshore over the medium term (Chart 1b). Finally, January is seasonally the slowest month for NZGB buying."
"Looking ahead, one factor which should persist for some time will be the RBNZ’s tightening cycle. Investors are likely to significantly increase NZGB exposures once they perceive term interest rates have fully priced the whole cycle (including an allowance for an overshoot) but we don’t expect that to occur until the RBNZ has hiked a number of times. In the meantime, further selling pressure could push swap spreads even lower."