Strong demand for bonds, but little on offer

Investors have developed an appetite for corporate bonds are there is strong demand for the securities this year as the level of new issuance continues to subside.

Thursday, 20 May 2010

by Paul McBeth

Geoff Wilson, associate director of retail investor sales at Westpac Institutional Bank, told advisers at a Society of Independent Financial Advisers conference in Wellington that even though corporates had not been issuing as many bonds this year as they did last year, there was still strong demand for good quality fixed interest securities.

"We've got strong demand in performance on the secondary market, with low levels of redemption," Wilson said. "They're all pricing extremely well against central bank prices."

This comes as investors prepare for the Reserve Bank to begin hiking the official cash rate, which markets expect will be boosted 182 basis points over the coming 12 months according to the Overnight Interest Swap curve.

Still, this will not filter too much into the bond market with lending and deposit margins damped by the central bank's new prudential and liquidity requirements on financial institutions.

Westpac's Imre Speizer, a market strategist, told the SIFA conference that he expects the shorter-dated interest rates to rise with the OCR, though longer-dated rates will remain the same, flattening the yield curve.

"The short-end of the yield curve will move up higher and faster than the 10-year rates," he said. "Two-year rates won't be that different from 10-year rates."

At the moment, two-year government bonds pay a yield of 3.85% while 10-year bonds have an interest rate of 5.72%.

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