The RBNZ today announced it would purchase up to NZ$30bn of NZ Government bonds over the next 12 months as part of a “Large Scale Asset Purchase Programme” (LSAP) – also known as quantitative easing (or QE).
This follows similar actions by central banks across the globe in an effort to keep bond yields low and support wider economic activity. In effect, the RBNZ’s bond buying programme will help fund the significant increase in government bond issuance required to fund the Covid-19 fiscal response.
The magnitude of the RBNZ programme is significant ($30bn equates to almost 10% of GDP) and has seen NZ government bond yields fall sharply in response, contributing to an easing in overall financial conditions. Indeed, the NZ 10yr bond yield has fallen by more than 50bps to 0.95% in early trading. Over time, a lower “risk-free” term structure will help improve liquidity and reduce volatility evident in other parts of the NZ fixed income market.
Delving into the details of the LSAP programme, the RBNZ will initially purchase up to $750m of Government bonds at weekly tenders over the next 12 months. These RBNZ purchases will include all government bonds across the yield curve and will at least match the significant ramp up in weekly government bond issuance expected from the NZ Treasury in coming quarters.
AMP Capital views today’s RBNZ move as a very positive development. In anticipation of today’s announcement, we had been adding duration to our fixed income portfolios as yields backed up. We also moved to an overweight position in longer-dated government bonds. Portfolio’s retain a strong focus towards liquidity, despite the dislocation evident across fixed income markets through March.
Looking ahead, we expect yields to remain lower for longer and yield curves to flatten, although increased government bond issuance muddies the water for direction at the longer end of the curve, something we will be paying close attention to. The credit position in the portfolios remains conservative and we are well placed to take advantage of wider credit spreads when we feel it is opportune.
Subscribe below to receive latest articles straight to your inboxCarrick Lucas, Portfolio Manager
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