Eye on Kiwi Bond interest rate offers

16 Jan 2024

Interest.co.nz

Savers who value the Government-guaranteed Kiwi Bond offer should be aware that in a declining interest rate environment, these rates are vulnerable to being trimmed

Savers who use the Treasury's Kiwi Bond offers should keep an eye on their offer rates.

Declining wholesale rates may induce them to trim these rates. The current rates may represent the high point in the current cycle.

Treasury (or more precisely, the Debt Management Office of Treasury) last set these rates on August 28, 2023.

For subscriptions of $1,000 - $500,000 they have since stood at:

Maturity	Rate
6 months	5.25 percent per annum
12 months	5.50 percent per annum
2 years	5.00 percent per annum
4 years	4.75 percent per annum

At the time they said: "Kiwi Bond interest rates are set periodically from moving averages of domestic wholesale interest rates. The new Kiwi Bond interest rates have been set to better align to those available in wholesale markets".

Although the OCR has remained fixed at 5.5% (since May 25, 2023), in fact domestic wholesale interest rates have fallen.

Since August 28, 2023, the falls in wholesale swap rates have been notable.

	6 mths	12 mths	2 years	4 years
	%	%	%	%
28-Aug-23	5.75	5.78	5.56	5.09
16-Jan-24	5.58	5.32	4.74	4.32
--------------	-------	-------	-------	-------
Shift	-0.17	-0.46	-0.82	-0.77

When the current offers were set five months ago, wholesale rates had a broad link to the OCR. Now they are two or three 0.25% steps below.

But it is no certainty the Treasury will shift lower. They could, using their past logic, but they may not.

The RBNZ pays banks the OCR on their Settlement Balances. The RBNZ's logic is: "Paying the OCR on all settlement cash balances means that banks with settlement accounts have little incentive to lend settlement cash in the market at interest rates lower than the OCR. The OCR therefore acts as a floor under key short term market interest rates." (page 4) This way, RBNZ anchors short-term interest rates at or near the OCR.

But as you can see this has only anchored the short 6 month wholesale rate, but none of the others that are longer. They have fallen in response to global influences.

It would not be a surprise to see Treasury move in 2024 to adjust Kiwi Bond interest rates lower for fixed terms of 1 year to 4 years.

The pressure for lower rates is building across a whole range of financial metrics. Of course, the Treasury could well wait until after the dust settles from the upcoming Conway speech at the end of the month.

Savers who value Government-guaranteed term deposits at what are relatively high current rates should assess the current position.