NZ Government Bonds

[Alan3285]

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]

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]

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]

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]

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]

So the government bonds currently out at the moment... http://www.directbroking.co.nz/direc...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]

So the government bonds currently out at the moment... http://www.directbroking.co.nz/direc...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]

http://www.nzdmo.govt.nz/securities/.../latestresults

So are these ones coming out soon?

[Alan3285]

http://www.nzdmo.govt.nz/securities/.../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]

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