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New Zealand Government Bonds – through the pandemic and beyond

This Bulletin provides an overview of developments in the New Zealand Government Bond market over recent years.

Joseph Gregan and Elliot Jones

Key points

New Zealand Government Bonds (NZGBs) are issued by New Zealand Debt Management (NZDM) on behalf of the New Zealand Government. Part of the New Zealand Treasury, NZDM issues these bonds with the objective of minimising the Crown’s borrowing costs over the long term with due consideration to risk. 

In addition to its importance for funding government spending, the NZGB market is also critical for transmitting changes in the Monetary Policy Committee’s monetary policy settings, because the yield on government bonds serve as a benchmark for yields on other assets.

The NZGB market has undergone significant structural changes over recent years with the COVID-19 pandemic being a catalyst for a number of these developments. 

This Bulletin discusses developments in the NZGB market through three broad time periods. We start by discussing how extreme economic uncertainty due to the onset of the pandemic in 2020 led to a broad deterioration in the functioning of sovereign bond markets. During this period, bond markets were not operating normally, making it difficult to execute trades and leading to highly volatile price movements. In response, many central banks, including the Reserve Bank of New Zealand, announced new policy measures which were successful in restoring the functioning of these markets and easing financial conditions. 

We then discuss developments in the NZGB market as monetary stimulus was reduced in mid-2021, following improving economic activity and rising inflation as COVID-19 restrictions were gradually eased. Finally, we discuss how the NZGB market has responded to the significant increase in yields and net supply of NZGBs since the second half of 2021, finding that the market has continued to function well in the face of these significant shifts.

Why we did this research:

The Reserve Bank monitors developments in the NZGB market for several reasons. 

  • Firstly, to identify how changes in monetary policy settings are transmitting through interest rates in the economy given that government bond yields serve as a benchmark for yields on other assets. This includes both changes to the OCR and the implementation of some of the Reserve Bank’s additional monetary policy tools, such as the Large Scale Asset Purchase programme
  • Second, government bond curves provide useful information about market participants expectations for the economic outlook over a long period of time. 
  • Third, we look to understand how the NZGB market is functioning at a given point in time and to understand what drove periods of market dysfunction in the past. Market functioning allows investors to buy and sell large amounts of bonds at short notice without materially affecting the price and supports the smooth transmission of monetary policy changes.