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An update on Eurokiwi and Uridashi bonds

David Drage, Anella Munro, Catherine Sleeman

This article provides an update on the market for offshore issues of New Zealand dollar denominated bonds, commonly referred to as New Zealand dollar Eurobonds, Eurokiwis, New Zealand dollar Uridashi, and global issues. Net issuance of these bonds has surged in the past two years, driven by strong demand for credit in New Zealand (high domestic interest rates) and by supply conditions internationally (low yields in Europe and Japan). Offshore issuance of New Zealand dollar bonds provides an important channel for New Zealand firms and households to access foreign capital and reduces, at the margin, our cost of capital. These bonds provide a useful source of hedging for New Zealand's foreign currency external debt, reducing the potential for undesirable valuation effects during times of stress. Ex-post returns on Eurokiwi bonds that had matured by the end of 2004 were on average the same, in euros, as German government bonds, but more variable, reflecting exchange rate risk. In theory, the increased supply of foreign capital from offshore New Zealand dollar bonds puts upward pressure on the New Zealand dollar at issue and downward pressure at maturity. However, historical data suggests that any exchange rate impact around the time of maturity tends to be small, consistent with the idea expected effects are priced-in well in advance by forward-looking markets.