New Zealand government bonds are offering investors better returns than bank debt for only the second time since records began, as worldwide investors create financial market volatility by quitting liquid assets in droves.
The rare and theoretically improbable event, which suggests New Zealand corporates are more credit-worthy than the sovereign government, has happened once before in the 11 years for which records exist. That was at the height of the global financial crisis, early last year.
Seven and 10-year government bonds traded above their equivalent swap rates as a renewed bout of risk aversion has investors shunning New Zealand in favour of so-called safe havens such as US Treasuries.
With greater liquidity in corporate debt markets, those rates have come down faster than government bonds.
Seven-year government bonds are paying 5.01 per cent and 10-year government debt is paying 5.3 per cent, compared to corporate debt which is at 4.75 per cent and 5.04 per cent respectively. At the start of the year, seven-year government bonds paid 5.83 per cent and 10-year debt paid 6.12 per cent.
"The overnight government bond market has much less liquidity, which is one reason why swap rates fell and we got the cross-over," said Imre Speizer, market strategist at Westpac. "Global fears are resurfacing and risk aversion is driving people into US Treasuries."
Government debt is considered the safest place to park your money, and usually pays a lower return than any other investment.
Speizer said local interest rates crossed over briefly during global financial crisis at the start of last year, "but prior to that never in the 11 years of data we've got."
New Zealand interest rate markets also have to contend with Australian rates, which are sitting at a higher level after the Reserve Bank of Australia began tightening monetary policy last year after the so-called lucky country dodged a recession and embarked on the road to normality.
This week's auction of government debt attracted similar rates from offshore investors, with the seven-year bond selling at an average 4.99 per cent and the 10-year going at an average 5.29 per cent.
Phil Combes, New Zealand Debt Management Office treasurer, said certain investors will find government rates attractive, and there were signs of that in the auction, which sold $400 million worth of debt.
"There's already emerging evidence investors are attracted by government bonds trading over swaps," Combes said. "I wasn't surprised to see a pick-up in demand."
Combes said the government debt programme was tracking ahead of schedule as it looks to sell $12.5 billion this year, though "things are going to be more challenging."
The Government trimmed its debt programme in the May budget, and brought forward its issuance to take advantage of historically cheap debt.