Key Points

• The RBNZ’s quantitative easing (QE), Large Scale Asset Purchase (LSAP) programme has kicked off to a very promising start.
• In a tug-of-war between massive Reserve Bank purchases and NZ Treasury issuance, the Reserve Bank is winning.
• The New Zealand Local Government Authority raised $1.1billion in new bonds issued today – a record amount.
• Along with better COVID-19 news in New Zealand and a rebound in equities, we are starting to see better activity in high grade NZ credit.
• The market is hoping this will flow through to the broader credit market. Early signs are encouraging, but the jury is out on the poor cousins at the lower end of the credit spectrum.

Financial markets are not alone in loving time-honoured phrases to convey ideas. “A rising tide lifts all boats” was originally used by John F Kennedy to suggest that a stronger economy would help everyone. We have learnt over the last couple of decades that it isn’t as simple as that with many people left behind, while others thrive.

However, the Reserve Bank of New Zealand (RBNZ) is hoping that the concept will apply successfully to their quantitative easing (QE) initiative, labelled Large Scale Asset Purchase (LSAP) Programme. It has gotten off to a very promising start. The RBNZ will buy as much as $30billlion in New Zealand Government stock and $3billion in Local Government Funding Authority (LGFA) bonds over coming months. This week marks the third week of the LSAP, with $1.8billion of purchases.

Shortly before LSAP was announced, 10-year New Zealand Government stock yields surged to 1.75%, from below 1.00% only a week earlier. The move was driven by concerns about a massive increase in government stock issuance, to fund the Government’s support programme, coinciding with dreadful market liquidity conditions. The move higher in yields was the largest seen since the late 1980’s when this writer was a rather green bond trader. To their credit, the RBNZ moved quickly, announcing LSAP. Since then, government 10-year bond yields have dropped back towards 1.00%.