Longer maturities cost more

The New Zealand Debt Management Office added a further NZ$100 million to its new May 2021 line last week, to take outstandings to NZ$200 million. The new bonds were issued at an average yield of 6.08 per cent, which is tighter than the 6.20 per cent achieved the week before. Oversubscriptions were also greater, at more than three times compared with 2.2 times.

Also sold were NZ$25 million of November 2011 and December 2017 government bonds at average yields of 3.54 per cent and 5.49 per cent, respectively. Both offers were oversubscribed more than seven times.

The RBNZ released its May 2009 Financial Stability Report mid-week in which, among other things, it noted that only one bank had issued offshore term debt using the government's wholesale guarantee. This was ANZ National, which paid Libor plus 150 basis points for the privilege of raising US$1.0 billion in the US s144A market for three years, in late March.

As we observed at the time, this was not cheap funding.

The RBNZ reiterated that the banks need to lengthen their debt maturity structure to reduce their vulnerability to offshore market disruptions. It was noted that the RBNZ's new prudential liquidity policy, which will be released around the end of this month, will help to reinforce this objective.

There is no doubt that this is an important objective, but increasing the proportion of longer term funding will also increase the banks' cost of funds.

This is why, as Interest.co.nz pointed out, the RBNZ's monetary policy has lost its potency. That the official cash rate is at 2.5 per cent bears no relationship to the banks' cost of funds and this is why the banks have not reduced lending rates, and if anything, are more likely to increase them going forward.