The Government has cancelled a $4 billion bond issue because of recent market volatility, but the move could be an indicator of problems ahead for the Government's $150 billion retail deposit guarantee scheme.
Why would investors, normally conservative and prudent, stay with historically safe, but lower interest-bearing, government bonds when they could go elsewhere to higher yielding, riskier (but which now carried a Government capital guarantee) investments, was the question posed by ABN Amro Craigs broker, Peter McIntyre.
At present, the Government agency New Zealand Debt Management Office has about $18 billion on issue in five bond branches.
The bonds, which are often directed to infrastructure spending, a budget which both Labour and the National Party have said will be boosted post-election, increase to soften the effects of recession.
Yesterday, the office cancelled a $4 billion issue, citing recent share market volatility and said it was "prudent to defer issuance until market conditions have settled".
Treasurer for the office, Philip Combes, said government bonds had been aggressively sold since the Government announced a blanket guarantee for deposit holders, to safeguard the market.
It is not the first time a bond issue has been postponed, but it is rare.
Mr Combes said the notice of cancellation did not suggest an inability to raise funds through government bonds, and the next bond tender is scheduled for October 30.
"The decision is a practical one, based on our recognition that it may not be prudent to continue with the bond tender solely for this round because of the temporary, one-off set of circumstances," he said.
Mr McIntyre said the cancellation of bonds would have a "direct impact on economic policy", which may require the Government to consider increasing yields, ultimately costing the taxpayer more.
ASB chief economist Nick Tuffley took a more moderate stance, saying the globally "risk averse" investors had initially "poured" funds into their respective government bonds, but now that flow was reversing out of bonds.
"Bond yields have recently been up and down. Investors are just heading [selling bonds] back to where the money originally came from," he said, when contacted yesterday.
BNZ senior economist Craig Ebert said another facet of the bond issue to consider was that following the end of the two-year guarantee, there will be a reverse flow of money out of the the riskier investments, which could strip companies of cash.
During the past two weeks, market volatility has been reflected in the prices of commodities, gold and oil swinging wildly as investors sought traditional safe havens but then sold out to maintain American cash.
