Good time for Government to borrow

Last updated 09:18 09/06/2012

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The Government is hell-bent on lowering its debt, but fixed-income experts say now is the perfect time for the Government to up its borrowing.

Why? To save tens of million of dollars a year in interest costs.

The advice, which runs counter to the Government's current bent, comes as demand for so-called safe-haven assets is on the rise again, with international investors increasingly fearful that the European debt crisis will tip over into the wider global economy.

New Zealand, at arm's length from the eye of the fiscal storm, has been one of the beneficiaries of this flight to safety, with investors prepared to accept lower interest payments to hold non-eurozone debt.

Yields on New Zealand 10-year government bonds recently traded at 3.375 per cent, historically low, well shy of the 5.85 per cent Kiwis have paid on average, but attractive compared with US 10-year Treasuries trading about 1.5 per cent.

Currently the Debt Management Office – which handles the Government's borrowing requirements – is planning to issue $13.5 billion in longer-dated bonds next year.

But Annette Beacher, head of Asia-Pacific research for financial services provider TD Securities, says that should be lifted by a further $1.5b.

Beacher is not saying the Government should increase its debt long-term, but shuffle forward some of its borrowing because conditions are better now than they may be later.

Issuing $1.5b of 10-year bonds at today's rates would cost the Government $50.6m a year in interest, versus the $87.8m a year it would typically pay.

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