| WELLINGTON, March 3
WELLINGTON, March 3 Anticipating New Zealand's
first monetary tightening cycle in 10 years, yield-hungry global
investors are again piling into its financial assets, hinting at
a return of the "kiwi carry trade".
That could push the currency to its highest level since it
was allowed to trade freely in 1985 and provide an uncomfortable
reminder to policymakers of the flood of capital that shook the
economy eight years ago, leading to the loss of the country's
coveted gold-plated credit rating.
The economy is recovering faster than its developed world
peers following the global financial crisis and the central bank
has flagged it will raise interest rates as soon as next month
to keep a lid on inflation risks spurred by strong agricultural
and construction sectors.
Overseas demand for a recent debt offering in New Zealand by
a foreign entity - a NZ$550 million issue from the International
Bank of Reconstruction and Development - was the highest to
date, arranger ANZ said. Three quarters of the offer was snapped
up by offshore accounts, compared with around half seen on most
so-called kauri bond deals in the past year.
"New Zealand's economic outlook and relative attractiveness
of its yields is probably a key factor," said Glen Sorensen,
director of syndication at ANZ in Wellington.
"The RBNZ's tightening cycle has been anticipated for some
time and as such has been reflected in higher term yields, which
is a positive driver for kauri bonds."
Supply of kauri bonds doubled in 2013 from 2012 to hit
NZ$5.46 billion, near the record high of NZ$5.53 billion in
Issuance has soared on the back of rising New Zealand swap
rates, which have raised the yields offered on these bonds
compared with the country's sovereign debt offerings, while a
government plan to reduce bond issuance has created demand for
highly rated financial products.
RETURN OF 'MRS. WATANABE'?
The rate cycle and rise in the New Zealand dollar is
reviving the carry trade, where foreign investors use
lower-yielding currencies to fund investments in higher-yielding
assets. That could drive an already strong New Zealand dollar
towards 80.00 against a currency basket, which would be
its highest level since the kiwi was floated in 1985. It was
78.51 early on Monday.
Foreign capital flooded into New Zealand between 2004 and
2007, when official policy rates rose as high as 8.25 percent.
At the time, Japan's brigade of yield-seeking mom-and-pop
investors collectively termed "Mrs. Watanabe", were major
investors through kiwi-denominated uridashi debt - issued by
foreign entities specifically for the Japanese retail market.
The uridashi market dried up when the central bank began
cutting rates after the 2008 global financial crisis and signs
now suggest Japanese investors are mostly waiting in the wings
for higher returns before looking to invest again in New Zealand
"Interest rates on the kiwi are now coming back above those
on the Aussie, but I think it will take some time for a product
that has slowed down sharply to catch fire again," said Sayaka
Ikegami, a marketing director for primary fixed income products
at Daiwa Securities in Tokyo, one of Japan's biggest sellers of
uridashi bonds. "Right now Japanese investors have many other
emerging currencies to choose from."
Still, investors elsewhere may see New Zealand as a
relatively safe bet, market sources said, especially after the
selloff this year in emerging markets. By comparison New Zealand
provides an attractive middle ground to investors looking for
higher yields in a stable country with solid economic
fundamentals, they said.
"It is a hunt for safe yield. With New Zealand being a more
stable albeit small economy, it's viewed as a safe harbour, if
you like ... although it doesn't yield as much as Brazil or
Turkey," said a manager of European syndications in London, who
declined to be identified because he was not authorised to speak
publicly to the media.
The prospect of foreigners owning more New Zealand debt
highlights though the perennial bugbear of the island nation's
open economy, which has a long-standing current account deficit.
Offshore holdings of government securities reached nearly
three-quarters of outstanding debt by mid-2008 as the country's
banks looked overseas for funding to service a borrowing binge
creating a huge liability for the country's trade balance.
Ratings agencies Standard & Poor's and Fitch blamed foreign
debt levels as the major reason for cutting the country's prized
triple-A credit rating in 2011.
S&P sovereign analyst Craig Michaels said external debt
remained a key risk dogging New Zealand, but a reduction of bank
funding requirements had made it a smaller issue than
"Stronger demand for New Zealand dollar assets from
foreigners over the next few years is likely to increase but not
to the degree that we saw before the global financial crisis."