New Zealand Government Bonds: High Yield, Short Maturity

Apr.22.10 | About: WisdomTree Australian (AUNZ)
How about 5% New Zealand government bonds for 5 years?

Investors should consider international bonds for the following reasons:

  • The US government politically seems to have less stability by the day.
  • In this low rate environment, people are often seeking higher interest rates.
  • It's current wisdom that through proper diversification you can reduce risk.
  • Many believe the US dollar currency could decline in value due to government spending.
  • Many other international debt issues have preformed far better than both the US government and US corporate debt.

Currently, we recommend that higher net worth individuals take a look at New Zealand. Buy or get a quote here for international government and corporate bonds, including New Zealand bonds. Investors are often surprised at how easy it can be to buy/invest in foreign government and corporate securities.

New Zealand Economy

New Zealand (NZD) is the lowest ranked for the least corrupt country on the Transparency International Corruption Perceptions Index (CPI) of 2009.

New Zealand Government Debt

New Zealand government bonds receive superb ratings (Aa3/ AAA).

Yields (updated April 21, 2010):

  • NZD 2011 3.691
  • NZD 2012 4.500
  • NZD 2015 5.154
  • NZD 2017 5.664
  • NZD 2018 5.958

Since New Zealand's debts are in the 5% range, the yield premiums for New Zealand government debt is about 3% higher than US Treasury debt for the same 5-year maturity. This is over double for a comparable government AAA rated debt, but still well short of Brazil government bonds currently.

Their currency (the New Zealand dollar) issues could, and will, affect future returns. Yet, America's debt is exploding and there are many academic studies claiming that a diversified portfolio from US currency could actually reduce US citizens' portfolios; especially if they have an over-abundance or, worse yet, 100% of their assets in US dollars.

While working with other nations, some debt is more restrictive to US citizens than others and New Zealand has lower restrictions than some.

New Zealand hovernment bonds maturing in 2015 are yielding around 5.05-5.15%. The New Zealand dollar (their underlying currency) is popular with currency traders due to high interest rates in New Zealand. Recent indication: 1 New Zealand dollar = 0.7115 U.S. dollars (April 21,2010).

The relative freedom of the foreign exchange market from government intervention and the general stability of it's economy and political system all add to the prevailing view that the New Zealand dollar offers diversification benefits in a portfolio containing the major world currencies (especially, because of it's greater exposure to Asian economies and the commodities cycle).

New Zealand Restrictions

  • $10,000 minimum.
  • Smaller investment sizes often give lower yields.

Buying in a single country increases your investment risk due to currency fluctuation and ownership of foreign debt (knowing that the volatility of each underlying security is higher). But, if you properly build a diversified portfolio utilizing several countries, both government and corporate debt, the portfolio could actually reduce risk while adding significant income.

Currently, it is our opinion that the future stability of the US dollar is at very high levels of risk for increased volatility; higher than I've ever seen it in my 25-year career. It's due to the twin issues of overall US government increases in spending, making a very large corresponding debt even larger, along with the great increase in political instability that appears to be growing by the day. These two titanic shifts will, in my opinion, greatly increase the underlying volatility of the US dollar with a higher probability that the US dollar will under-preform.

New Zealand on the Positive Side

New ZealandTen Economic Freedoms of New Zealand
99.9 Business Freedom Avg 64.6 80.0 Investment Freedom Avg 49.0
86.0 Trade Freedom Avg. 74.2 80.0 Financial Freedom Avg 48.5
63.6 Fiscal Freedom Avg. 75.4 95.0 Property Rights Avg 43.8
51.3 Government Spending Avg. 65.0 93.0 Fdm. from Corruption Avg 40.5
83.1 Monetary Freedom Avg. 70.6 88.8 Labor Freedom Avg 62.1
Click to enlarge

New Zealand’s economic freedom score is 82.1, making it's economy the 4th freest in the 2010 Index. It's score is 0.1 point better than last year, reflecting modest improvements in trade freedom and fiscal freedom. New Zealand is ranked 4th out of 41 countries in the Asia–Pacific region.

New Zealand continues to be a global leader in economic freedom, performing well on most of the components measured in the Index. The economy has an impressive record of market reforms and benefits from it's openness to global trade and investments. The banking sector is characterized by sound regulations and prudent lending practices, and well-implemented structural reforms have allowed the New Zealand economy to weather the recent global financial and economic crisis relatively unscathed.

New Zealand on the Negative Side

Public debt at 29.3% of GDP (2009 est.), even though it's low by most economic standards, is still well above the last report of New Zealand's neighbor, Australia, who has somewhat higher yields and less debt.

Quick Facts Population:

  • 4.3 million

GDP (PPP):

  • $115.4 billion
  • -1.6% growth
  • 2.0% 5-year compound annual growth
  • $27,029 per capita

Unemployment:

  • 4.2%

Inflation (CPI):

  • 4.0%

FDI Inflow:

  • $2.0 billion

Conclusion

New Zealand's long term position as a stable economy and political system with shrewd fiscal management with an over 5% yield, or over 2 times the same comparable maturity in US debt, plus protection against a possible US decline in currency (but, at risk against a rising dollar) in this market appears doubly attractive for US investors.

Disclosure: No positions