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ENP
15-04-2010, 11:30 AM
How do you buy these?

Can anyone buy them as long as you have the minimum $10,000 deposit?

There are things about successful and un-successful bids?

GTM 3442
15-04-2010, 02:50 PM
1) You buy them through your sharebroker. Ring your sharebroker and tell her which maturity date you want to buy. They will be happy to arrange this for you and charge you the brokerage. Nice folk. Helpful.

2) Anyone can buy them.

3) This is the wholesale end of it - out of my league.

ENP
15-04-2010, 02:58 PM
Great thanks.

ENP
15-04-2010, 04:09 PM
Does the NZ government offer these every month, year, or just when ever they feel like it?

peat
15-04-2010, 08:50 PM
http://www.nzdmo.govt.nz/securities/kiwibonds

ENP
16-04-2010, 08:08 AM
http://www.nzdmo.govt.nz/securities/kiwibonds

They say they are only 6 months, 1 year and 2 year bonds. But on NZX website, some close in 2017?

Also can someone explain to me how all the different ones on this website work?

http://www.interest.co.nz/moneymarket.asp

Basically what I'm wanting to know is are which ones on the interest.co.nz website are "tax free" and what are Redeemable / Perpetual Preference Shares?

Thanks. Just trying to learn as much as possible.

Alan3285
16-04-2010, 09:13 AM
Not to hijack, but also, are they 'listed' on the NZDX?

If so, I don't see them, but perhaps I am looking in the wrong place!?

Thanks,

Alan.

GTM 3442
16-04-2010, 09:25 AM
Yes, they're "listed" - you can find them under "Fixed Interest" on the Direct website. I've always bought them over the phone, so have no idea if you can buy or sell on-line.

GTM 3442
16-04-2010, 09:28 AM
They say they are only 6 months, 1 year and 2 year bonds. But on NZX website, some close in 2017?

Also can someone explain to me how all the different ones on this website work?

http://www.interest.co.nz/moneymarket.asp

Basically what I'm wanting to know is are which ones on the interest.co.nz website are "tax free" and what are Redeemable / Perpetual Preference Shares?

Thanks. Just trying to learn as much as possible.


Don't get confused between "Kiwibonds" which are a retail product, and Government Stock. Kiwibonds are not tradeable, but Govt Stock is. I don't know that the government does perpetuals.

And I'm not sure on the "tax-free" angle - can anyone elaborate ?

ENP
16-04-2010, 09:35 AM
Don't get confused between "Kiwibonds" which are a retail product, and Government Stock. Kiwibonds are not tradeable, but Govt Stock is. I don't know that the government does perpetuals.

And I'm not sure on the "tax-free" angle - can anyone elaborate ?

Oh right, yes I wondered why Kiwibonds were like 3.5% interest then the NZDX were 6%

So can you buy these 6% ones in the IPO for them or do you have to buy them once they are on the NZDX? If so, who buys them first when they come out? Wholesale/retail, ?? And the tax free angle, I'm talking about municipal bonds, is that what these are? Or are they corporate bonds even though the Manakau City Council offers them?

Alan3285
16-04-2010, 12:44 PM
Yes, they're "listed" - you can find them under "Fixed Interest" on the Direct website. I've always bought them over the phone, so have no idea if you can buy or sell on-line.

{Alan hangs his head in shame}

Can't work out why I didn't see them there :confused:

Must have done a 'boy look'!

Thanks,

Alan.

ENP
16-04-2010, 01:51 PM
How do you buy them when the first come out though? I'm aware how to buy them when they are on the NZDX but is there like IPO or something for them? Same with corporate bonds. And what are Redeemable, Perpetual Preference Shares

ENP
16-04-2010, 02:29 PM
Ahh I've done a bit of research and found out what preference shares are. These seem like great investments... with high interest. Please explain if I'm worng?

Is the coupon the initial interest % rate and then the buy yield % the difference if the bond has gone up or down in price?

Alan3285
16-04-2010, 03:14 PM
Hi ENP,


Ahh I've done a bit of research and found out what preference shares are. These seem like great investments... with high interest. Please explain if I'm worng?



That depends on lots of factors.

Sometimes they are good, sometimes not so.

You'd have to take into account many things such as (but not limited to):

- Default risk
- Current alternative rates / investment options
- Trust deed

Others may add to this list perhaps.




Is the coupon the initial interest % rate and then the buy yield % the difference if the bond has gone up or down in price?

Yes.

However, bear in mind that with some prefs, the rate might change, say, annually. If so, it is often based off some benchmark rate (1 yr swap rate for example) and with a margin on top.


HTH,

Alan.

GTM 3442
16-04-2010, 05:16 PM
In todays climate, where I see interest rates rising over the next 5 years, perpetuals with an annual reset are probably a good idea for some proportion of your portfolio.

But a lot of people have lost a lot of money because they bought perpetuals without realising that they were, indeed, perpetual , and that the only way to get at the capital was to sell them.

Interest rates had fallen, rates had been reset, and they got hit with a double whammy - their interest was cut, and their capital eroded.

They have their place. But a careful maturity profile will give a similar effect.

Alan3285
16-04-2010, 05:27 PM
In todays climate, where I see interest rates rising over the next 5 years, perpetuals with an annual reset are probably a good idea for some proportion of your portfolio.

But a lot of people have lost a lot of money because they bought perpetuals without realising that they were, indeed, perpetual , and that the only way to get at the capital was to sell them.

Interest rates had fallen, rates had been reset, and they got hit with a double whammy - their interest was cut, and their capital eroded.

They have their place. But a careful maturity profile will give a similar effect.

Absolutely great advice to anyone that is investing with a need for income - always make sure their maturity profile is nicely spread out.

I'm not sure I would recommend any 'reset' prefs for an investor that needed the income from them.

Alan.

GTM 3442
16-04-2010, 05:41 PM
I'm not sure I would recommend any 'reset' prefs for an investor that needed the income from them.

Alan.

It's a precaution in case of inflation. Only a proportion.

Alan3285
16-04-2010, 06:49 PM
It's a precaution in case of inflation. Only a proportion.

Fair enough - a small proportion perhaps ;-)

I guess I would see a utility equity share as a good inflation hedge too though. Something like an electric company, or Ports of Auckland perhaps.

To be honest, its not something I have spent a lot of time considering, since I am not investing for the income at this point, so I am after total return, and if I get nothing for a while, I don't have to worry.

Alan.

GTM 3442
16-04-2010, 07:01 PM
Alan - For my sins, I got to look after my mothers money a few years ago.

After exiting anything which wasn't an income share (such as LNN, CEN, PFI, KCE etc, which we kept), and making sure that nothing went back into a finance company when it came due, I set up a Fixed Interest portfolio:

40% Govt Stock, with staggered maturities
40% Senior Bank Bonds across all the big banks, with staggered maturities
10% Bank Perpetuals
10% Corporate Bonds with staggered maturities

It's all set up with a 5-year time-frame, so 20% of the portfolio matures each year.

We also set aside 3 "speculations", which tend to make money overall, but which provide a bit of interest.

And shares in anything which does a shareholder offer (eg OBV) that she's interested in.

Seems to have worked out well.

GTM 3442
16-04-2010, 07:06 PM
What actually scared me the most was that I went to two reputable financial planning organisations (no names, no pack drill), and they wanted to put her into places which aren't there any more. I value their suggestions occasionally, and she would have seen a 50 - 75% capital loss has we followed their advice.

Alan3285
16-04-2010, 09:47 PM
What actually scared me the most was that I went to two reputable financial planning organisations (no names, no pack drill), and they wanted to put her into places which aren't there any more. I value their suggestions occasionally, and she would have seen a 50 - 75% capital loss has we followed their advice.

Unfortunately, doesn't surprise me.

The portfolio you outlined looks pretty solid to me - unless the NZ Govt goes belly up, in which case we are all in it deep!

Alan.

ENP
17-04-2010, 06:18 AM
Ok thanks guys that explains heaps. One last question I've asked a few times but haven't got a straight answer to...

How do you buy the government and corporate bonds when they first come out as opposed to buying later on, on the NZDX. Thanks once again.

ENP.

Alan3285
17-04-2010, 11:36 AM
Hi ENP,

I don't know, but it would seem likely to me that the govt would only sell them directly to something like a 'registered' person.

Perhaps you have to be big enough (capital adequacy etc etc) to get in on the auctions, since they wouldn't want to be dealing with hundreds or thousands of small investors I guess.

To be honest, this is the sort of thing that is likely to change in the 'near' future with them being done online, and if you want to bid, you'll probably have to pre-deposit funds to cover whatever bids you want to make.

'Near' being entirely undefined!

Alan.

ENP
18-04-2010, 08:12 AM
So you are better to just buy government bonds and corporate bonds on the NZDX a few days after they come out?

Also is there any books which explain government/corporate bonds really well?

Alan3285
18-04-2010, 10:31 AM
So you are better to just buy government bonds and corporate bonds on the NZDX a few days after they come out?

Also is there any books which explain government/corporate bonds really well?

Well, bearing in mind that I did say I wasn't positive, I don't think you have any choice but to buy them on market.

No reason to exclude bonds that have been out for some time though - you should buy what makes sense for your portfolio, and that might be a 9.5 year old, 10 year bond, with six months to run.


No idea about books. What do you want to know? Bonds are pretty simple really - you are lending money to the government, they pay you interest, and you get the loan repaid at maturity (unless the government defaults!)

Alan.

ENP
18-04-2010, 01:00 PM
So there's no real strategy to it. It's just like a term deposit, but from the government and companies instead of banks. But you can sell them and still recieve the interest, unlike when you cancel a term deposit.

Mainly I'm wanting to learn more about preference/perpetual shares, I'm fairly clued up now on the other types but not 100% sure how these work.

ENP
19-04-2010, 07:42 AM
https://www.directbroking.co.nz/DirectTrade/dynamic/issues.aspx

So when ever a new bond issue is done by corporates or the government it will come up here?

ENP
19-04-2010, 07:56 AM
Also with these perpetual/prefernece shares... http://www.interest.co.nz/moneymarket.asp take Rabobank AA- Perpetual $10,000 9.48% 0.8140 for example. Would the 9.48% take the initial 1.00 buy price or the new 0.8140 buy price. i.e. if I bought them today, would I get a 9.48% yield or a 11.65% yield? (9.48/0.8140)

Thanks.

Alan3285
19-04-2010, 08:50 AM
Also with these perpetual/prefernece shares... http://www.interest.co.nz/moneymarket.asp take Rabobank AA- Perpetual $10,000 9.48% 0.8140 for example. Would the 9.48% take the initial 1.00 buy price or the new 0.8140 buy price. i.e. if I bought them today, would I get a 9.48% yield or a 11.65% yield? (9.48/0.8140)

Thanks.

The quoted yield in the name of the bond is the nominal yield.

The actual yield is what you would see on the trading board (buy / sell prices).


I did a quick look, so maybe these figures are wrong, but I couldn't see either of your numbers:

Right now I think you can buy RBOHA for $81.20 per $100 nominal.

I believe the nominal rate on those is 4.123%.

If those numbers are right (and do check for yourself!) then the actual yield is just over 5%.

We might be looking at different securities of course, but the above example calculation method should work for any perpetuals.

As we discussed above, one thing to remember though is that the yield is not fixed if a perpetual has an interest rate reset mechanism.


HTH,

Alan.

ENP
19-04-2010, 09:41 AM
As we discussed above, one thing to remember though is that the yield is not fixed if a perpetual has an interest rate reset mechanism.


How do you find out if it does or not?

peat
19-04-2010, 10:00 AM
http://www.raboplus.co.nz/raboplus-tv-radio-ads/press-releases/16Sept07-capital-securities-These-are-unsecured-subordinated-perpetual-securities.aspx

What return does it offer?
The rate has yet to be set but is likely to be in the 9-9.25 per cent range for the first year. After that, the rate will be reset annually at a fixed margin over the one-year swap rate.

confirmed here on nzx as well
http://www.nzx.com/markets/NZDX/RBOHA/announcements/2948875/Rate-re-set-for-Rabobank-Capital-Securities

Rate re-set for Rabobank Capital Securities
The interest rate for the next 12 months was set today at 4.1230% reflecting the margin of 0.76% over the one year swap rate.

The interest rate will be reset annually on each 8 October until 2016 at the 0.76% margin over the prevailing one year swap rate. After that, the interest rate will be reset quarterly at the same margin over the prevailing 90-day bank bill rate

Alan3285
19-04-2010, 10:08 AM
http://www.raboplus.co.nz/raboplus-tv-radio-ads/press-releases/16Sept07-capital-securities-These-are-unsecured-subordinated-perpetual-securities.aspx

What return does it offer?
The rate has yet to be set but is likely to be in the 9-9.25 per cent range for the first year. After that, the rate will be reset annually at a fixed margin over the one-year swap rate.

confirmed here on nzx as well
http://www.nzx.com/markets/NZDX/RBOHA/announcements/2948875/Rate-re-set-for-Rabobank-Capital-Securities

Rate re-set for Rabobank Capital Securities
The interest rate for the next 12 months was set today at 4.1230% reflecting the margin of 0.76% over the one year swap rate.

The interest rate will be reset annually on each 8 October until 2016 at the 0.76% margin over the prevailing one year swap rate. After that, the interest rate will be reset quarterly at the same margin over the prevailing 90-day bank bill rate

ENP:

I suspect that also explains the difference between your numbers and mine. You were probably quoting the original (first year) interest rate, whereas probably I was using the one after the rate-reset.

Just goes to show how much they can change! Bear in mind also that the (capital) value of the bond will change as expectations of the 1 yr swap rate change (at least in theory).

Alan.

ENP
19-04-2010, 10:16 AM
So the risks involved are:

- the interest rate may go down
- when you come to sell it, you may sell it for less than you payed for it

Where as with government and corporate bonds, the rate stays the same, but you may buy for more or less than the original when it was issued.

So if the 90 day bill interest rate goes up, the preference shares have to go up equally with it +0.76% ??

ENP
19-04-2010, 11:12 AM
On the interest.co.nz website where it says the "minimum" investment amount of $5000, $10,000, etc is that just when they were first issued?

eg. If I only had $2000 to invest I could still buy them?

Alan3285
19-04-2010, 11:15 AM
So the risks involved are:

- the interest rate may go down
- when you come to sell it, you may sell it for less than you payed for it

Where as with government and corporate bonds, the rate stays the same, but you may buy for more or less than the original when it was issued.

So if the 90 day bill interest rate goes up, the preference shares have to go up equally with it +0.76% ??


As far as I know, all current NZ Govt bonds are fixed rates for the full term (if anyone knows differently please do post here with details), so when you buy, you know exactly what yield you will get right to the end (assuming no default).

With the periodic-reset securities, the situation is more complex, since you might see a rise in 1 yr swaps come Oct 2010, and then you might be expecting 1 yr swaps to be lower for the next 20 years (just as an example).

If that was the case, the value might actually fall, even though the next reset could be upwards.

If you find any discussions on how to value periodic-reset securities, I would be very interested to see them since, as far as I know, there is no way to value them except to retreat to doing a DCF calculation out for a sufficiently long period of time, and make all the assumptions along the way.


On the interest.co.nz website where it says the "minimum" investment amount of $5000, $10,000, etc is that just when they were first issued?

eg. If I only had $2000 to invest I could still buy them?

On the question of minimum investments, I would expect that those apply right through the entire term of the bond. However, bear in mind that those are nominal amounts. If the current market value of a bond is $80 per $100 nominal, and the minimum investment is $5000 (nominal), then you would need to invest a minimum of $4,000 of your cash. Also, many bonds have limits along the lines of min = $5,000 and $1,000 thereafter, so you could buy $5,000 or $6,000, but not $3,000 (all nominal).

HTH,

Alan.

ENP
19-04-2010, 11:20 AM
Ok great, thanks Alan you have been a big big help.

I'll try do a bit of google searching and see what I can find. I've just been comparing charts of historical term deposits vs government bonds and the government bonds don't seem to provide any better returns, sometimes they are lower. I though bonds were more risky than term deposits?

Alan3285
19-04-2010, 11:42 AM
Ok great, thanks Alan you have been a big big help.

I'll try do a bit of google searching and see what I can find. I've just been comparing charts of historical term deposits vs government bonds and the government bonds don't seem to provide any better returns, sometimes they are lower. I though bonds were more risky than term deposits?

Not sure why that would be.

The risk with any bond really is default-risk. Either that they delay paying your interest, never pay it, and / or you don't get all your capital back.

I would imagine that the NZ Govt is less risky than most commercial banks that offer term deposits in NZ, and hence the rates from NZ Govt bonds should be lower.

I believe that many people would regard NZD Govt bond yields as being a proxy for the 'risk free rate of return' in NZD.


HTH,

Alan.


PS: You can always click on my 'reputation' icon on the posts that were helpful! I have no idea what it does, or whether I get a notification or anything, but I just noticed them myself, so I am wondering!

ENP
20-04-2010, 11:39 AM
So when there is a "bull market" in bonds or the bonds yields "spike" does this mean the new listings will spike with initial offerings of higher % interests compared to what IPO ones are today?

Or does it mean lots of people will sell them for say $80 instead of $100 so the yields will "spike" upwards even though the initial % is the same?

Alan3285
20-04-2010, 06:53 PM
Hi ENP,


So when there is a "bull market" in bonds or the bonds yields "spike" does this mean the new listings will spike with initial offerings of higher % interests compared to what IPO ones are today?



I will assume that by "bull market in bonds" you mean that the capital value is increasing (or, equivalently, the yields are dropping).

If so, then I would expect new issues to be at lower rates than previous issues (where capital values were lower, yields higher).

As a taxpayer, I certainly hope so!



Or does it mean lots of people will sell them for say $80 instead of $100 so the yields will "spike" upwards even though the initial % is the same?

So here we are talking about the secondary market?

If the capital value drops to $80 (from $100 previously), then the yield will rise. How much depends on how long the bond has to run to maturity.

If a 'bull market' is where the govt is able to issue bonds with a lower interest rate, then that is (I hope!) what they would do, and the issue price will be around $100 still.

I *believe* that the bonds are actually auctioned. So the govt offers say, bonds with a given maturity, paying X%.

Then I imagine that the players who are willing and able to bid, put in their bids for varying volumes / prices, and the govt then runs down the bids until they get to the point that the cumulative volume meets their requirement, and that sets the price they go for.

I could be wrong, but that's how most homogenous-stock auctions work I think.

Alan.

ENP
21-04-2010, 08:11 AM
So "bear market rally" means to buy for $100 at say 6% government bond. Then sell 6 months later at $120?

Alan3285
21-04-2010, 08:22 AM
So "bear market rally" means to buy for $100 at say 6% government bond. Then sell 6 months later at $120?

You might consider that to be a 'bear market rally' I guess.

I don't expect there is any definitive definition of 'bear market' - it is whatever you think, or perhaps what everyone collectively thinks.

Alan.

ENP
21-04-2010, 11:35 AM
One more question. Why are the ones that mature 2021 around 5.95% and the ones that expire earlier (2011, 2015, 2017, etc) all lower interest rates?

They are all roughly originally paying the same rate of 6% but it seems as the get closer to maturity, the buying interest % goes down?

Alan3285
21-04-2010, 01:15 PM
Hi ENP,


One more question. Why are the ones that mature 2021 around 5.95% and the ones that expire earlier (2011, 2015, 2017, etc) all lower interest rates?

They are all roughly originally paying the same rate of 6% but it seems as the get closer to maturity, the buying interest % goes down?


I can only speculate, but perhaps the market expects longer term rates to be higher than short term rates, and hence the price of the longer dated bonds is lower (yield is higher)?

Also, there is inherently a greater uncertainty the further out you go, so longer dated bonds would likely have a higher yield.


Alan.

Dubdee
21-04-2010, 03:15 PM
There are two types of perpetual hybrids listed in NZ:The early type which has an annual reset of the dividend rate (based on 1 year swap interest rate plus the fixed credit margin) called "annual Floaters" and the later type which have a fixed rate for the first five years, the reset each five years subsequently ( based on the then 5 year swap plus the fixed margin. All these are callable at par so there are some dangers in paying over par in the secondary market. The dividend is based on the face value, usually $1.00 so if you buy for less than $1.00 your running yield is higher than nominal

These are quite difficult to value. Most brokers value these using a model which effectively uses the swap yield curve for 1 -10 years to interpolate what the market is implying what the 1years swap rate will be in 1, 2 3 etc years hence and then does a DCF on the resultant dividend flows plus a terminal amount much the same way shares are valued using DCF.

All this is used the derive the implied credit margin on the securities and all the hybrids are ranked by margin and their credit ratings compared.

there are oftn striking anomalies with for instance ASBPB offering significantly better value that ASBPA by the same issuer( Disc holdings)

There are even better hybrid deals listed on ASX. Nufarm (NFNG) currently showing a 14% credit margin

Alan3285
21-04-2010, 03:30 PM
Hi Dubdee,


There are two types of perpetual hybrids listed in NZ:The early type which has an annual reset of the dividend rate (based on 1 year swap interest rate plus the fixed credit margin) called "annual Floaters" and the later type which have a fixed rate for the first five years, the reset each five years subsequently ( based on the then 5 year swap plus the fixed margin. All these are callable at par so there are some dangers in paying over par in the secondary market. The dividend is based on the face value, usually $1.00 so if you buy for less than $1.00 your running yield is higher than nominal

These are quite difficult to value. Most brokers value these using a model which effectively uses the swap yield curve for 1 -10 years to interpolate what the market is implying what the 1years swap rate will be in 1, 2 3 etc years hence and then does a DCF on the resultant dividend flows plus a terminal amount much the same way shares are valued using DCF.

All this is used the derive the implied credit margin on the securities and all the hybrids are ranked by margin and their credit ratings compared.

there are oftn striking anomalies with for instance ASBPB offering significantly better value that ASBPA by the same issuer( Disc holdings)

There are even better hybrid deals listed on ASX. Nufarm (NFNG) currently showing a 14% credit margin

Thanks for that!

As I stated above, I did think that the only way to value these periodic-reset perpetuals was to do a DCF calculation, but it looks like you have something very much more specific, than my general assumption.

Can you supply either a more detailed calculation example (perhaps in a spreadsheet), or a link to one?

Thanks,

Alan.

ENP
22-04-2010, 08:35 PM
So the government bonds currently out at the moment... http://www.directbroking.co.nz/directtrade/dynamic/ratesheet.aspx

How often do these come out? Every year? Every 2-3 years? And when they are issued, are they all 10 year maturities? Or are some only 1 year or 5 year?

So for example, the one that expires in 2011, did that come out in 2001 or just recently?

Alan3285
22-04-2010, 08:58 PM
So the government bonds currently out at the moment... http://www.directbroking.co.nz/directtrade/dynamic/ratesheet.aspx

How often do these come out? Every year? Every 2-3 years? And when they are issued, are they all 10 year maturities? Or are some only 1 year or 5 year?

So for example, the one that expires in 2011, did that come out in 2001 or just recently?


I guess you'd have to look up each one individually, but they are issued with varying maturities (although I believe there tend to be standard terms, so you'll not likely see a 13 yr, 2 month bond issued, but it is possible).

I imagine treasury tries to get the lowest rates, and keep the average maturity at a reasonable length of time, and simultaneously avoid any significant 'lumps' in the maturities.

Certainly you get short term (1 yr for example) and long term (30 yrs for example) bonds overseas, so I imagine you also get them from the NZ govt.

Alan.

ENP
26-04-2010, 10:50 AM
http://www.nzdmo.govt.nz/securities/govtbonds/latestresults

So are these ones coming out soon?

Alan3285
26-04-2010, 12:05 PM
http://www.nzdmo.govt.nz/securities/govtbonds/latestresults

So are these ones coming out soon?

I'd guess so.

If you are interested, I suggest contacting your broker and asking them when they start trading (if not already).

It may also be possible to put in a bid right now (even if they haven't started trading), that will go on the board when they come on. I'm not sure about that - just a guess, and I'm not suggesting you do that!


Alan.

Dubdee
28-04-2010, 01:43 PM
Alan,

sorry but my broker (Forbar) has the model not me. Its something which I understand needs to be updated each day with the yield curves and prices. but they can tell me effectivly what the implied credit spread is given any discount or premium attached to the price.

I suspect any of the bigger brokers will have such a tool and could advise you about relative value.

cheers

peat
31-08-2010, 08:31 PM
perhaps the govt should have waited for todays issuance until all the SCF funds have percolated.

Latest Treasury bill tender not fully subscribed

peat
06-09-2010, 11:14 AM
thoughts on how the earthquake could affect interest rates ?

I see pressure to sell bonds by the EQC - apparently their 6 billion fund is largely invested in NZ govt bonds - causing some pressure on rates to rise.

Alan3285
06-09-2010, 11:47 AM
thoughts on how the earthquake could affect interest rates ?

I see pressure to sell bonds by the EQC - apparently their 6 billion fund is largely invested in NZ govt bonds - causing some pressure on rates to rise.

Thinking out loud:

EQC may need to sell bonds (as per Peat) - Supply up, price of bonds down (yield up), interest rates up

Govt may need to borrow to pay for repairs - Supply of bonds up, price of bonds fall, Demand for money up, price of money (interest rates) up


So, yes, I would expect interest rates to rise on this, but whether it is big enough to have a lot of impact I have no idea.

Also possible that IF (not saying this is so) rates were falling already, then this just mitigates that fall to a lesser reduction.


Alan.

777
06-09-2010, 12:28 PM
There was a suggestion by some commentator on the radio this morning that this would push up longer term rates.

For what it worth most, if not all, major banks have dropped their retail 5 yr rate down to 6.2% or 6.0% from 6.75% over the past week or so. National and ANZ doing theirs today.

Alan3285
06-09-2010, 01:23 PM
There was a suggestion by some commentator on the radio this morning that this would push up longer term rates.

For what it worth most, if not all, major banks have dropped their retail 5 yr rate down to 6.2% or 6.0% from 6.75% over the past week or so. National and ANZ doing theirs today.

Yes - which is why I am thinking that we might see falling rates, even though the effect of the earthquake is to lift rates. The global economy is a stronger wind than the Canterbury current.

Alan.

peat
07-09-2010, 08:35 AM
“The big reaction has been in the bond market, where we’ve seen quite a big sell-off,” said Khoon Goh (http://search.bloomberg.com/search?q=Khoon%20Goh&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), head of market economics and strategy at ANZ National Bank Ltd. in Wellington. “The main concern is the impact on the government’s finances in terms of funding the reconstruction cost.”


http://www.bloomberg.com/news/2010-09-05/new-zealand-dollar-bonds-decline-on-1-4-billion-earthquake-cleanup-bill.html

Alan3285
07-09-2010, 08:46 AM
“The big reaction has been in the bond market, where we’ve seen quite a big sell-off,” said Khoon Goh (http://search.bloomberg.com/search?q=Khoon%20Goh&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1&partialfields=-wnnis:NOAVSYND&lr=-lang_ja), head of market economics and strategy at ANZ National Bank Ltd. in Wellington. “The main concern is the impact on the government’s finances in terms of funding the reconstruction cost.”


http://www.bloomberg.com/news/2010-09-05/new-zealand-dollar-bonds-decline-on-1-4-billion-earthquake-cleanup-bill.html


Expected, but may be wrong in that I read somewhere else (and cannot now find it), that EQC said they do not expect to be liquidating any significant number of bonds.

That could be just them talking things up so as to get a better price of course!

Alan.

peat
07-09-2010, 09:31 AM
yeh its what I expected but not what you said :p

which is why I am thinking that we might see falling rates

update from the PM via interest.co.nz

"Key said the Earthquake Commission expected not to have to liquidate or sell government bonds to help pay for the reconstruction costs of the Christchurch Earthquake. Some had feared a mass sale of government bonds by the Commission would push up market interest rates, which may in turn have pushed up mortgage and deposit rates."

Alan3285
07-09-2010, 09:50 AM
yeh its what I expected but not what you said :p


update from the PM via interest.co.nz

"Key said the Earthquake Commission expected not to have to liquidate or sell government bonds to help pay for the reconstruction costs of the Christchurch Earthquake. Some had feared a mass sale of government bonds by the Commission would push up market interest rates, which may in turn have pushed up mortgage and deposit rates."

Which?

They could be talking up the market ahead of some softly softly liquidations 'in the normal course of business'.

Unless EQC is sitting on hundred of millions in cash, they will have to be liquidating something? Could they be sitting on that much cash?

Alan.

Dubdee
07-09-2010, 10:04 AM
2009 balance sheet showed 3.7 bn in bonds and 1.6 bn in global equities. little cash. But it might be a bit like Tower in that they have glbal reinsurance for a good part of the risk, and remember risk is capped at 100K per property

peat
07-09-2010, 10:07 AM
its unlikely they sit on too much cash as it just wouldnt be sensible from a long term perspective and yet.... maybe they do as part of their flexibility strategy.
I suspect JK is talkin the market to some extent... certainly wouldnt want to admit to having to make big forced sales

Alan3285
07-09-2010, 10:25 AM
its unlikely they sit on too much cash as it just wouldnt be sensible from a long term perspective and yet.... maybe they do as part of their flexibility strategy.
I suspect JK is talkin the market to some extent... certainly wouldnt want to admit to having to make big forced sales

Indeed.

Even if they do have re-insurance, they'll still cary some amount of risk, and if they don't have cash, it will mean liquidating assets at some point (even if they just borrowed short term, it would still mean liquidation of assets somewhere down the line).

Looks to me that bond prices have to be under *some* pressure despite what JK is saying.

Alan.

peat
16-09-2010, 06:26 PM
New Zealand's government authorised the Earthquake Commission to sell stocks and bonds to raise more money to deal with the claims. The commission's Natural Disaster Fund had $4.4 billion in bonds, stocks and bank bills at the start of September, Finance Minister Bill English said

Alan3285
23-09-2010, 01:49 PM
New Zealand's government authorised the Earthquake Commission to sell stocks and bonds to raise more money to deal with the claims. The commission's Natural Disaster Fund had $4.4 billion in bonds, stocks and bank bills at the start of September, Finance Minister Bill English said

What a shock.

Boom Boom.

;)

Dubdee
08-11-2010, 02:33 PM
The government does not issue perpetuals, just fixed term bonds and treasury bills. Of the bonds most are fixed rate with the exception of one series of CPI linked which trade on a real yield basis.

Preference shares are generaly highly subordianted and stand next to equity. Have a look at the situation of pref holders in Strategic and South Canterbury. Zilch back for them. So its not only the return on but also the return of your money thats important.

Alan3285
08-11-2010, 09:54 PM
Wouldn't this be the NZ Dollar? ...... (Tongue in cheek remark about the heavy footprint the govt has on the NZ economy.)

{Grin}

Zero coupon, and open ended.

Nice.

Alan.

Dubdee
09-11-2010, 01:45 PM
I think the NZ Government bond programme is misconceived.


The preponderance of offshore investors means that no tax is collected by the NZ revenue from Non residents investors and their buying is responsble for the appreciating NZ dollar trashing our export and manufacturing returns

CJ
09-11-2010, 03:54 PM
I think the NZ Government bond programme is misconceived.


The preponderance of offshore investors means that no tax is collected by the NZ revenue from Non residents investors and their buying is responsble for the appreciating NZ dollar trashing our export and manufacturing returnsWhat about NRWT or would they all qualify for AIL?

Dubdee
10-11-2010, 10:19 AM
There is no NRWT charged and AIL is paid by the Cown ( to itself of course) so not one cent of tax is collected from non residents.

No wonder 70% is held by non residnts and that they set the pricing.

I have wrttien to bill English on the subject as he was quoted in a finance mag as not understanding why NZ residents didnt buy NZGS. Because we cant compete yield wise with those offshore as we all pay tax on the returns.

Just putting aside the consequences on the exchange rate of this programme

CJ
10-11-2010, 10:35 AM
There is no NRWT charged and AIL is paid by the Cown ( to itself of course) so not one cent of tax is collected from non residents. So NRWT is factored into the price which explains why residents dont like it.

peat
10-11-2010, 11:32 AM
I feel an idiot to have to ask but they say the only idiot is someone who doesnt ask

What is AIL?

Alan3285
10-11-2010, 12:43 PM
I feel an idiot to have to ask but they say the only idiot is someone who doesnt ask

What is AIL?

Approved Issuer Levy (http://www.ird.govt.nz/nrwt/approved-issuer-levy/general-info/)


Alan.

Dubdee
15-11-2010, 02:55 PM
I would like to say I had a hand in the introduction of AIL.


Withholding tax is a tax tranfer between governments. If an Aussie invests here and NZ WHT is deducted then they get a credit in their Aussie tax return for tax paid to the NZ govt. In effect this is a transfer from the Aussie to NZ government. In 1980s forgien banks wanted to lend to NZ resdents on the basis that the borrwer would refund them the NRWT deducted as many oerated from tax havens. The Jap banks keen then to get market share offered to absorb the NRWT for the NZ borrowers on the basis that they could collect a refund from the Jap goverment. So for them it was just a question of timing. Tax paid now to NZ tax refunded later in Japan.

Keen to facilitiate capital inflows AIL was set up to facilitiate these flows from tax havens. AIL substiutues for NRWT and is good for all offshore lenders who operate where there is no tax traety with NZ. However no credit is given under the DTA with palces like Austrlai. Its beter to pay NRWT and get a full refund that suffer AIL. AIL was priced of the time value of money calculations that the japs made re their tax refunds, being 2% of interest paid

Alan3285
15-11-2010, 03:15 PM
I would like to say I had a hand in the introduction of AIL.


Withholding tax is a tax tranfer between governments. If an Aussie invests here and NZ WHT is deducted then they get a credit in their Aussie tax return for tax paid to the NZ govt. In effect this is a transfer from the Aussie to NZ government. In 1980s forgien banks wanted to lend to NZ resdents on the basis that the borrwer would refund them the NRWT deducted as many oerated from tax havens. The Jap banks keen then to get market share offered to absorb the NRWT for the NZ borrowers on the basis that they could collect a refund from the Jap goverment. So for them it was just a question of timing. Tax paid now to NZ tax refunded later in Japan.

Keen to facilitiate capital inflows AIL was set up to facilitiate these flows from tax havens. AIL substiutues for NRWT and is good for all offshore lenders who operate where there is no tax traety with NZ. However no credit is given under the DTA with palces like Austrlai. Its beter to pay NRWT and get a full refund that suffer AIL. AIL was priced of the time value of money calculations that the japs made re their tax refunds, being 2% of interest paid

Who'd a thunk it - we have a tax guru in our midst.

Any and All tax questions.... we know who to ask!

:-)

Alan.

777
15-11-2010, 04:55 PM
Well I have a question. I will get in before you get tired of answering them Dubdee.

If I was to leave NZ for a year or two, and therefore become non resident, can I use AIL for all my investments left in NZ. I don't intend being resident in any country for any length of time, just doing an extended OE in retirement. Or can I have RWT set at zero while a non resident.

Thanks.

Alan3285
15-11-2010, 06:23 PM
You know, it makes me think that there is room out there for a tax wiki or something like it.

You post a question like that, and people chip in with what they think the answer is (and just as importantly, why they think that is the case - quoting a section number, or a TIB, or whatever source they like). Others may disagree, and quote different sources. At the very least, you could then take that to your accountant and it would cost less if you are being more specific about queries.

Alan.

CJ
15-11-2010, 07:28 PM
You know, it makes me think that there is room out there for a tax wiki or something like it.I am on another (property) forum where members often post tax questions and people provide their answers based on their understanding or discussions with accountants. Accountants normally come along at some stage and close out the circle.

I am sure there are enough (ex)Accountants on this forum that if you post a tax question it will get answered - the question is where to post it?

Alan3285
15-11-2010, 09:20 PM
I am on another (property) forum where members often post tax questions and people provide their answers based on their understanding or discussions with accountants. Accountants normally come along at some stage and close out the circle.

I am sure there are enough (ex)Accountants on this forum that if you post a tax question it will get answered - the question is where to post it?

A new forum do you mean?

peat
15-11-2010, 11:38 PM
Well I have a question. I will get in before you get tired of answering them Dubdee.

If I was to leave NZ for a year or two, and therefore become non resident, can I use AIL for all my investments left in NZ. I don't intend being resident in any country for any length of time, just doing an extended OE in retirement. Or can I have RWT set at zero while a non resident.

Thanks.
Section YD 1 says that you are a tax resident if you have a permanent place of abode in NZ. Full stop. If you can say no to that then you can then become non resident by not being in NZ for 183 days in any 12 mth period OR by being absent from NZ for 325 days in any 12 mth period. And the date you are deemed non resident is the first of those 325 days. This is not really your question but I thought I'd define it as a starter.

Dubdee
16-11-2010, 09:22 AM
just a bush tax lawyer who has spent a bit of time looking at tax in relation to fixed income. If you are keen on fixed income set aup a trading company to hold it. and put everything on revenue account. NZ tax is unfairly asymmentric on the treatment of gains and losses on fixed income.

Dubdee
16-11-2010, 09:35 AM
I think the test for being a NZ resident goes beyond just a place of abode. The test is very subjective and largely would be one that you consider NZ home. Having nz bank accounts credit cards etc are a test. Residential property ownership another. Remember they are trying to net the maximum number of taxpayers.

I had a nasty situation some time ago when I permanetly resided in Austrlai but becuse of my links with NZ ( bank account trusteeships etc) they considered me a tax resident of NZ as well as Australia.

I got a NZ tax credit for Australian tax paid but wound up net paying the the NZ tax rate on Australian earnings, but with an additional sting. Non resident NZ taxpayers are not able to group tax losses from NZ activites (LAQC) with their oveseas sourced income even if it is subject to NZ tax. So dont ever think the tax system is fair.

peat
17-03-2011, 09:39 PM
Japanese trusts account own a staggering 11.2 per cent of total New Zealand bond market.

http://www.businessspectator.com.au/bs.nsf/Article/Japan-nuclear-tsunami-crisis-Australian-bonds-insu-pd20110317-EZS6Q?OpenDocument&src=kgb

Lizard
18-03-2011, 07:11 AM
Japanese trusts account own a staggering 11.2 per cent of total New Zealand bond market.

http://www.businessspectator.com.au/bs.nsf/Article/Japan-nuclear-tsunami-crisis-Australian-bonds-insu-pd20110317-EZS6Q?OpenDocument&src=kgb


Yes, it seems NZ govt debt is going to come under pressure at both ends from recent disasters.

I am wondering if mortgage and deposit rates might become less influenced by the OCR as a result and more tied to winning capital. Higher interest payment could be a bit tough overall for NZ, with NIIP to GDP being up there - although possibly a weaker exchange rate would buy us some leeway there.