A chronicle of repurchase agreements (RP) and other paradoxical property ownership contracts - www.omo.co.nz


Click for a larger image       Historical vs S&P 500
Sources: Outright Purchases, SFP, RP, TIO, TAF, PCF, MLLLC (July 3), CPFFLLC (Oct.30), TALF
Updated NZT 21 October, 2014 11:04 AM

Click for a larger image      RBNZ FX intervention P&L spread sheet
Source: RBNZ
Updated NZT 21 October, 2014 11:04 AM


The author acknowledges the previous help of Tom Yarnall.

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OMO Matters

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Total NZ Government Securities on Issue. 21/10/14 - Updated Daily

Principal: NZD 77,766.01 millions

Accrued Interest: NZD 733.07 millions

Total Debt: NZD 78,499.08 millions

Daily Accrual Cost: NZD ~10.7351 millions - 1.7704% of trailing annual nominal GDP

A sovereign can inflate away debt if the average interest rate on the debt falls below the growth in nominal GDP. (It doesn’t matter
whether it’s volume growth or inflation driving GDP.) It's called covert default. Source.

Liquidation of government debt - mandatory reading

Latest NZ Nominal Ann. GDP Growth: ~7.77%

Current NZ Average Interest Rate: ~5.04%

Notably, government debt term market yields are decidely lower than the GDP growth rate, as are the New Zealand taxpayer's 5.04% interest service costs.

NZ BOND CALCULATOR

Alert:15/4/14 - Updated Uridashi, Eurokiwi and Kauri bond issuance charts as of 31/3/14 can be viewed here.

Alert: 23/07/11 - The US Federal Reserve's latest (6 October '14) Non-M1 M2 money stock release suggests financial market players have reduced their exposure by ~ $1,582 billion since the 2011 debt ceiling debacle. Graphic view here.

Alert:29/4/11 - Today's NZDMO 5.0% 15/03/2019 note tender was overwhelmingly over bid (7.2125x), thus thoroughly discrediting buyer fatigue.

The outright yeild fell 25ps to 5.36% from last week's tender. The yield premium over swap and the US 7 yr note equivalent also fell. (-18bps) & (-16bps) respectively.

Dr Bollard's musings must have impressed upon buyers the negative growth outlook for the non - government private sector. Funding the government to spend into the ecomony must be the only game in town.

Alert: 26/04/11 - Today's NZDMO 3mth Tbill tender failed. Bids for NZD 135 million were registered for the NZD 200 million offered.

The 6mth and 1 year tranches didn't do much better with a 1 to 1 bid cover for the two NZD 50 million amounts offered. Notably the 1 year accepted rate rose 9bps to 2.93% from last week.

Buyers fatigue and no expiring contracts this week, or the Australian national holiday closing off the source of serious bidders?

We will have to wait until later in the week when the note tender comes around after the RNBZ OCR announcement on Thursday.

Alert: 22/04/11 - The latest US Treasury 5 year TIPS auction realised a negative yield. View results here.

While the RBNZ fiddles here with OCR @ 2.5% with annualised inflation @ ~ 4.5%, foreign dealers are not so sanguine.

In my view their pricing preferences forecast low US credit risk and massive inflation growth.

A small indebted nation like New Zealand flirts with both outcomes to it's ultimate detriment.

Alert: 10/03/11 - Landlords who have hiked rents in the wake of the Christchurch earthquake have been branded looters by another name by Mayor Bob Parker.

Has anybody noticed a gas price reduction in their energy bills lately?

If the predominately government owned energy companies are not looting their owners in the face of falling natural gas prices, what are they doing ?

If the govenor of the RBNZ thinks lowering the OCR should be regarded as an insurance measure to offset the negative economic impact of the Christchurch earthquake, why is the government not lowering the gas price ahead of a probable winter of misery down south?

Alert: 3/3/11- What banks want is what banks get. They marched Tbill tender rates down ~25 bps. The government's maitre d'hotel confirmed the order and no doubt the RBNZ's head waiter will deliver it, next week.

Inevitably NZ Government note yields rose at today's tender. The 10 year bench mark back to 5.63% (+6 bps) - where it was before the quake. Spreads blew out as well - +216 bps against the US 10 year and +39 bps against the swap.

Considering 10 year BPV01 is currently $0.78 per $1000 vs $0.03 for 3mth T bills, the taxpayer is decidely worse off.

Alert: 24/02/11 - Over zealous calls for the RBNZ to cut the OCR from 3.0% to 2.5% may harm taxpayers more than not, if the yield curve continues to steepen.

Overseas investors hardly overwhelmed the NZDMO with bids at today's note tender, especially in the short end , where yields had already fallen in Tuesday's T Bill tender.

In fact the longer dated bench mark 10 year issue (6%,15 May 2021) tender returned a relatively higher yield for investor's than last week when compared to US 10 year Treasuries and applicable swap rates.

US Treasury yields fell 14 bps from 3.62% to 3.48% over the comparison period, while NZ 10 year yields fell 6 bps from 5.63% to 5.57%. NZD 10 year tenor swaps fell 12 bps from 5.43% to 5.31%. Historical NZ tender data can be viewed here.

Alert: 15/02/11- How sluggish is the New Zealand economy? In terms of excess government cash (our TAX dollars) parked at the RBNZ, at a carry loss, it could be construed as positively bouyant. More so since the NZDMO only raised NZD 775 million new market debt during January '11. Details can be viewed here.

Alert:11/11/10 - N.Z. Earthquake Commission (EQC) buys $150 million 6%, 15/05/21 notes and $58 million 5%, 15/03/2019 notes directly from NZDMO.

Transfer payments to earthquake ravaged Christchurch home owners must still be pending.

But, to be fair the EQC was the beneficiary of $65 million and $45 million T bill redemptions on 30 September and 29 October, respectively. And will receive a further ~$35 million of coupon payments from Government Stock holdings on Monday.

Addendum - 12/11/10 - NZDMO confirms , today, the EQC sold $200 million 6%, 15/12/2017 notes.

So, in fact the EQC has approximately $137 million (notional) available to transfer to stricken Christchurch property owners.

Notably, the RBNZ buys another $100 million 5%, 15/03/2019 notes. Bringing the total purchased to $300 million.

Alert: 5/11/10 - They did it again - see Alert: 2/11/10 below.

RBNZ purchases another $100 million 15/03/2019, 5% notes directly from NZ Treasury. Bank demand for circulating notes must be explosive (doubtful) or the settlement amount due to the government is being electronically added to the RBNZ's liability ledger. Who knows? Maybe somebody at the RBNZ can state which assets are being sold, if that is the case, to finance this latest round of asset accumulation?

Unless, of course, the RBNZ is buying back outstanding, potential loss making NZD intervention sales. See graph on left.

Nonetheless, new government debt is being issued against cash delivered by the central bank to facilitate state transfer payments and hence bank deposit growth mortgaged against future taxes.

Alert: 4/11/10 - Buy the rumour, buy the fact.

"US Federal Reserve anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases." Read more.

Readers may also find it instructive to peruse the minutes of the meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association.

Alert: 2/11/10 - RBNZ and NZ Treasury undertake blatant debt monetisation (printing money). The RBNZ purchased $100 million 15/03/2019, 5% notes directly from the NZ Treasury. View details. Paid for no doubt with the proceeds of selli explosive ng freshly minted non- interest bearing IOU's, commonly known as circulating bank notes.

11/10/10 - NZX secures access to RBNZ 's Overnight Reverse Repo Facility - i.e. back up fully secured lending facility, subject to meeting RBNZ counterparty eligibility criteria. Read more.

I guess this facility backstops possible failed clearing house trades undertaken by NZX approved counterparties and thus NZX - very unusual.

Moreover, would this not be considered protection for ING (NZ) Holdings Ltd, a wholly owned ANZ Group subsidiary and NZX's largest shareholder?

The RBNZ eligible collateral list implies a significant ongoing committment by NZX to purchase securities that might not otherwise endure. Surely the spectre of moral hazard is abroad?

Yes indeed. It is a small step for NZX to migrate from an overnight scheme to full blown RBNZ sponsored RP (repurchase agreement) financed position taking in the positive yield curve government securities market. Remember GC is around the OCR and 10 year govvies 5.0%+.

US Primary Dealers certainly see opportunities in the US Treasury market given the Federal Reserve's QE related purchase actions.

Alert: 7/09/10 - For those anticipating an opportunity to make predatory purchases of the Earth Quake Commission's government bond holdings, a regular review of government deposits at the RBNZ would be in order.

Alert: 31/08/10 - An early consequence of the SCF receivership announcement together with the amended government deposit guarantee rules is a failed NZ Government T Bill tender.

Alert: 19/08/10 - Once again, as noted on 16/08/10, the NZ Government paid between 20 bps to 25 bps above the swap rate to issue debt. The most recent entries in this xls sheet confirm as much.

Equally, the bench mark 10 year note spread to 10 year US Government debt has widened to ~260 bps from ~220 bps over recent months.

It is increasingly viable to profitably fund purchases of our national obligations with short term finance and hedge the trade with swaps for the duration of the debt - ie pay fixed and receive floating with little or no risk.

Market players are dismissing our central bank governor's most recent encyclical in favour of practical pricing.

Alert: 16/08/10 - Stuff notes: Government debt offers better return than banks. Read more. What's more the RBNZ reveals that the NZ Government has been issuing debt over and above deficit spending requirements and lodging the proceeds with the RBNZ. View here under the heading Government Deposits.

Pre-funding anticipated deficits could be viewed as conservative money management in some quarters. But not if the average cost of issuance is ~5.50% and the O/N cash deposit rate offered by the RBNZ is ~3.0%.

Is the RBNZ on-lending the Government deposit to the same counterparties that bought the Government debt, hence financing positive carry position - at the citizens' expense? And if so who may those counterparties be other than our foreign owned domestic banks?

Alert: 11/08/10 - Federal Reserve Bank of New York statement regarding reinvestment of principal payments on agency debt and agency MBS - Read here.

Large Primary Dealers may have expected more. View graphic detail here.

Alert: 22/07/10 - Federal Reserve Bank of NY posts an extremely important tome in respect of the 'Shadow Banking' system and it's current implosion. The lessons learnt or not have important implications for New Zealand as our lending institutions begin to tap savings (deposits) via securitised mortgage securities.

Alert: 6/07/10 - NZ Government forced to pay up for short dated 3mth and 6mth T bills at today's tender. Successful bid yields rose significantly after last week's disastrous note auction at which the 2011 NZD 100 million tender received bids for only NZD 61million. In fact total bid cover for the whole note tender was 1.045%. Relevant data can be viewed here and here.

Alert: 20/5/10 -The New Zealand Debt Management Office (NZDMO) announced today details of the Government's 2010/11 domestic debt programme. The NZDMO intends to issue up to $12.5 billion of bonds in 2010/11. Read more.

30/03/10 - No taxation without representation should apply in this case.

Alert: 17/02/10 - Kauri Bond Sales Jump on Europe Concerns, ANZ Says. Read more.

Alert: 6/02/10 - Official says Fed might buy more mortgage-backed securities. Read more.

The Fed certainly reinforced it's willingness to arrest a downturn in equity indices when it brought forward the regular purchase of GSE agency obligations to Thursday rather than the usual Friday action. View details here.

Alert: 31/1/10 - FSA 's Lord Turner signals crackdown on carry trade. Read more.

Uridashi, Eurokiwi, Kauri issuance amounts to nothing other than a carry trade investment for foreigners investing in NZD denominated debt. Read more.

Combined outstanding bank funding of NZD ~45.0 billion poses major rollover risk if this type of finance is curtailed.

Alert: 26/01/10 - NZDMO to issue NZD 400 million Tbills to replace a maturing NZD 200 million tranche. The reprieve that was evident after settlement of the IRD vs Banks tax avoidance case (see Alert: 8/01/10 below) was certainly short lived.

Alert: 21/1/10 - NZDMO pays through swap to raise NZD 75.00 million for the 15 May 2021 maturity. Details can be viewed at the last entry in this xls spread sheet.

Alert: 8/01/10 - The selltlement of a NZD 2.2 billion tax avoidance case between the major Auatralian owned banks and IRD brings some government debt funding relief for the taxpayer. Read more.

Alert: 1/12010 - French Constitutional Court Rejects Carbon Tax - Read more. New Zealanders need to be ready to assert their rights in this matter, which is rapidly turning into a policy of pillaging the poor and needy for the benefit of a privileged few.

Alert: 4/12/09 - The Federal Reserve undertakes a trial daily open market operation drain. Read details here.

Despite the Fed affirming this small omo action as a readiness trial the 10/30 yr govt. note/bond spread flattened 5 bps from it's recent 100 bps high and 2 yr note yields rose 6 bps.

I consider this Federal Reserve action coupled with this week's sharp reduction in the alphabet soup liqiudity injection levels as a signal curve flattening will unfold aggressively from this point onward.

Alert: 26/11/09 - Not one month after reserve bank governor, Dr Bollard reiterated his stance that he expects to keep the OCR at the current level until the second half of 2010, the taxpayers are paying more than the cost of his exorbitant salary. Read OCR statement here.

The New Zealand Dollar has collapsed against the price of gold. View graphic details here.

If gold is recognised as an index of general commodity prices, and it is, we, the citizens, are not only experiencing our savings returns transferred for the benefit of the banks and their indebted property speculator clients, we are also about to endure a massive increase in imported costs.

Monetary policy that dictates a move to high risk assets and high import costs hardly builds a base for sound economic development.

It's time the Reserve Bank steered the economy on to a sound footing rather than defending a legacy of failed incumbent players.

Alert: 2/11/09 - NZDMO on behalf of the government raises net NZD 200 million new marketable debt over the month of October 2009.

This level of new debt issuance contrasts sharply with the amounts raised in the months of August (1.456 bn) and September ($2.395 bn). View details here.

However, there is a cost endured by all taxpayers. Since the failure of a 3 month T bill tender back on 18 August 2009, the NZDMO has been put under remarkable pressure to redeem outstanding bill issuance in the range of 2.65% to 2.80% yields and replace them with term notes yielding on average above 5.2%. In fact during October NZD 800 million T bills were redeemed while NZD 1,000 million notes were issued. View data here.

And while John Key embraces Dr Bollard's decision to hold short end rates low further out than is defendable, others, including myself view this as a costly short term exercise for those least able to pay. A small increase in the OCR would have little effect on the currency, yet would have served well to flatten the yield curve for eveybody's benefit.

Alert: 29/10/09 - RBNZ leaves OCR unchanged at 2.5%. Read statement here.

And just as you would expect Dr Bollard's interest outlook concurs with the view recently voiced by the the Prime Minister. Read more.

Unfortunately or otherwise our dominant Aussie owned banks take their cue from the RBA governor. Mr Stevens seems poised to hike rates 25 bps again next week. Read more.

Hence ANZ/National had the temerity to hike their longer term year deposit rates 25-50bps just before the RBNZ anouncement. Read more.

Who is supposedly in charge of monetary policy and earning NZD 500.000 plus per annum ? Not Dr Bollard and certainly not the NZ taxpayer unless they assert control.

Alert: 22/10/09 - “Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are. It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place.” – Mervyn King, BOE Governor

What else could South Canterbury Finance have in mind when offering to pay 8.0% to debenture holders right up to the expiry of our own government retail deposit guarantee scheme?

“Never in the field of financial endeavour has so much money been owed by so few to so many.” – Mervyn King, BOE Governor

Alert: 16/10/09 - USD 108.648 billion flows from the Federal Reserve's balance sheet to Primary Dealers over the last two trading days. View graphic depiction here.

Unsurprisingly, the US stock market finds itself on a never ending upward trajectory, along with the favoured carry trade currency pairs, including our own.

The breakdown includes: +USD 70.699 bn MBS outright purchase settlement, +USD 35.0 bn SPF redemption and +USD 2.949 bn US Treasury coupon pass.

Alert: 15/10/09 - Consumer price index up 1.7% in the Sep 09 Qtr. Another bubble in search of a pin?

The punishing 14 bp hike in yield paid by the NZDMO at today's 2021 note tender suggests as much. Results can be viewed here.

Alert: 11/10/09 - RBNZ releases 2008-09 Annual Report. A NZD 600 million government capital injection added to a NZD 475 million seignorage windfall painted lipstick on the pig. Read more.

Alert: 29/09/09 - South Canterbury Finance Limited 10.43 % 15/12/12 notes suffer a significant price collapse and hence a yield to maturity gain of 4.5 % to 27.00 %. View NZX details here.

Coincidently or otherwise (read Alert: 18/09/09) today's NZDMO T bill tender garnered outsize bids (NZD 1.3 billion) for the 6 month NZD 400 million tranche. View details here.

Also the credit spread between 3mth T bills and 3 mth bank bills widened 5bps to 19bps, bank bills over, since the last tender. View graph here.

One could rightly assume there is pending trouble in a significant segment of 'white gold' paradise. Maybe SCF has been unable to secure the much touted equity support to cover dairy farm related losses. Hence the banks that also lent money to these farms and SCF are possibly exposed.

Alert: 18/09/09 - NZDMO takes advantage of yesterday's strong bid on the 2011 tender offer to tap issue another NZD 200 miilion today. View recent issuance history here.

A total of NZD 650 million has been issued this week. Thus making up for last week's net ~NZD 50 million paydown.

Alert: 18/09/09 - My prognostication (see yesterday's Alert below) that the NZ Government may have to pay higher yields at the short end of the curve, when and if federal reserve governor, Dr Bernanke announces the cessation of Treasury quantitative easing, may have been premature.

The US Treasury has announced a significant scaling back of the Supplementary Financing Account. Under this programme Treasury issued short term cash management bills and deposited the proceeds with the Federal Reserve.

Current issuance stands at USD 200 billion with $30 to $35 billion tranches set to sequentially expire on a weekly basis staring next Thursday.

The addition of excess reserves, of this magnitude, into the US banking system, currently unwillling to lend out to local borrowers, will not doubt find their way into our NZD market via the carry trade.

This may seem an extravagant assertion but, this week's significant rally in the value of the NZD/USD currency pair occurred when the US Treasury managed a rare USD 20 billion net debt pay down week.

It must be noted debt ceiling restrictions are causing the US Treasury to cut back on issuance. Nevertheless, current political wrangling over increasing the ceiling just delays the inevitable.

Alert: 17/09/09 - NZDMO reported significant bidding for the 2011 offering at today's new cash note tender.

It would seem the run of uncontested RB bill redemptions is creating rollover demand for short end paper. NZD 1 billion plus bids were noted in the 6 month T bill offering on Tuesday.

At this point I have to conclude this activity reflects a transfer of the TAF sterilisation programme from one government department to another, with all the attendant consequences of misplaced inflationary government spending.

NZD 875 million of RB bills are due expire over the period to 1st October, in addition to the net NZD 1.5 billion that matured over recent weeks.

Buying interest for government short maturity issuance may dry up thereafter, without significant yield enticement. Especially so, if Dr Bernanke calls a halt to the US Treasury quantitative easing programme by 31st October.

Alert: 15/09/09 - RBNZ repo liqiuidity injections (NZD 600 million so far this week), supposedly aimed at easing 3.0% plus O/N forex deposit rates, certainly spurred bidding at today's NZD 400 million rollover T bill tender.

Alert: 10/09/09 - An unusual week. The finance minister and NZDMO officials return from a debt promotion tour of Japan and the US and then the government promptly curtails debt issuance.

Tuesday's net NZD 200 million paydown T Bill tender finances tomorrow's NZD 150 million note tender. This a sharp turnaround from August's average weekly net new issuance of NZD 364 million.

Moreover, the RBNZ redeemed NZD 850 million RB Bills today.

The system is flooded with net official debt redemptions and the NZDMO has cause or no immediate need to raise cash.

The later option seems unlikely given previous government forecasts of debt raising needs as high as NZD 40 billion over the next five years, if not sooner.

Did our debt enablers refuse extensions of credit or were they just a bit nervous about investing (vendor financing) at current NZD/USD currency pair levels?

I suspect our officials will not say. But the musings contained within this article should provoke some timely insights.

Alert: 31/08/09 - Today the RBNZ successfully conducted a NZD 400 million reverse repo (RRP) operation maturing on 4 September.

In effect the RBNZ lent cash against government collateral i.e. the same notes that were tendered by the NZDMO last Thursday and settle tomorrow.

Clearly this action of largesse will smooth the way for tomorrow's NZD 400 million fresh cash T bill tender announced today.

Readers may remember that a similar non-rollover tender of Tbills failed two weeks ago. Read: Alert: 18/08/09 - below.

The mechanics of Repurchase Agreement (RP) trading can be read here.

Alert: 26/08/09 - Today the NZ Government redeems NZD 600 million T bills to be replaced with only NZD 400 million face value T bills successfully tendered yesterday.

Is this, using Coca Cola adspeak, ' the pause that refreshes'? Possibly for the banks but certainly not for the long suffering taxpayer.

Since last week's failed T bill tender (note details in alert comment immediately below) the Government has settled the receipt of NZD 624.64 million of term funding at a weighted average cost of 5.1765% and redeemed a net NZD 149.6473 million Tbill debt at a weighted average cost of 2.74%.

Futhermore, NZD 450 milion RB bills (~2.65 -2.75% yield) matured last Thursday, despite an ineffectual attempt by the RBNZ to roll NZD 200 million. So much for maintaining the sterilisation offset of the NZD 6.55 billion TAF liquidity injection programme.

The net effect being the banks' broker/dealer community were called upon to raise a net NZD 24.9927 million to fund net new NZD 474.9927 million government marketable debt at a considerably higher yield.

For those concerned about the duration risk (~4.6 yrs) undertaken by the recipients of this largesse, one only has to remember Dr Bernanke's recent comments to Senate confirming the Federal Reserve will buy up to USD 10 trillion of US Government debt to ensure rising term yields are restrained.

Such an outcome causes the NZD/USD currency pair to move higher thus restraining taxable export income. Vicious circles?

I definitely do not feel refreshed by this pause in NZ Government T bill issuance.

Alert: 18/08/09 - NZ Government suffers the indiginity of Dr Bollard's imprudent intention to cap the OCR at or below 2.5% until the later part of 2010.

The latest NZDMO T Bill tender fails. Just NZD 156 million bids for NZD 400 million offered. View results here.

As I pointed out previously - (see Alert: 30/04/09 below) -" I firmly believe unsupported central bank forecasts of low rates as far ahead than is credible will actually cause longer term rates to rise".

And they did. BNZ recently matched Kiwibank, offering 6.5% for 5 year deposits. See here.

It was only a matter of time before the market rejected an RBNZ imposed non-market rate upon short term government debt issuance.

Alert: 30/07/09 - RBNZ leaves the OCR unchanged at 2.50 %. Read more.

The comment of interest being: - " However, looking forward the level of the New Zealand dollar and wholesale interest rates are higher than assumed in our forecasts. The level of the dollar in particular, is not helping the sustainability of future growth, and brings with it additional economic risks.

I thought it was apparently to one and all after Federal Reserve governor Dr. Bernanke announced 'quantitative easing' - a euphemism for printing money to facilitate devaluing the USD dollar, what path the NZD/USD pair would follow.

That was as far back as March this year. Even I had occasion to sound a warning. Read more. A commentator on Interest rate co nz concisely notes: - "Bolly you have been benign to the point of redundant. Return to your office and await further instruction."

But there is a more insidious action being undertaken by the Governor. By stating the OCR will remain at or below 2.5% out to the later part of 2010 another bubble is being fomented. That is, broker dealer purchases of excessive government debt issuance initiated by the attractions of an engineered steep yield curve. Read more. Such action by necessity involves borrowing short to lend long.

Not content with overseeing a trend to individual insolvency, the Governor is now hellbent on a directing a collective default.

Alert: 16/07/09 - In respect of my question, posed in Alert:2/07/09, asking in which asset class the RBNZ and EQC would seek to reinvest their proceeds from the maturing 15th July 2009 government note, it would seem not to be government debt for the RBNZ.

That is not quite true. The NZDMO confirms the EQC rolled into a range government debt maturities while the RBNZ rolled a paltry NZD 100 million of it's NZD 1.2869 billion principal share of the redemption.

Where's the money you might ask? Certainly not covering the full liability of issued notes and coins which amount to NZD 3.439 billion while the RBNZ's NZ Government Stock portion of it's balance sheet is now NZD 3.067 billion.

In not so polite society this outcome is generally referred to as "clipping the coin".

A little transparency concerning the whereabouts of this significant sum of money is required. Policy coherence is at risk when the Prime Minister eulogises about the world renown transparency of NZ Government finances, in a speech delivered earlier this week, whilst actions of this nature are transpiring.

Alert: 11/07/09 - "Show me the Money" Big banks to cut off California IOUs. Read more.

It is also apparent US citizens 'en masse' are having difficulties meeting day to day expenses from current income. Many are liquidating their money market accounts to cover arrears. Graphical proof can be viewed here. Source here.

I guess it's not much different here.

Alert: 9/07/09 - Documented government pressure on banks to reduce lending margins could not have come at worse time for all concerned parties.

Due to outsize Federal Government borrowing requirements, US authorities have had to publicly undermine the economic outlook to attract bidders at this week's Treasury auctions.

The outcome at our own NZDMO tender has been a significant shift down in government stock yields (32bps for the 2021 issue) while credit spread widening has caused bank swap rates to remain relatively unchanged over the last week. Comparative yields can be viewed here.

Alert: 3/07/09 - Is the RBNZ's liquidity management department operating in a state of disarray? Recent actions would tend to confirm as much.

After what can be only be decribed as an unsuccessful attempt to smooth the redemption of the 15 july 2009 government note. (see comment immediately below for details) they turn around and resort to issuing 80 day RB bills to drain liquidity at today's open market operation. View here.

To be fair the RBNZ has attempted over recent days to drain the government's rather large 1st July (new financial year) disbursement programme with short term repo omo. But our local banks have refused as they are unusually entitled to do. Maybe it's time for a review of the rules of participation in the RBNZ's liquidity management operations.

Alert: 2/07/09 - NZDMO issues NZD 2.05 billion new marketable securities over the month of June '09. This financial year end dash for cash on behalf of the citizens caps off a torrid six months of debt issuance. A total of NZD 7.558 billion in fact. Graphical details can be viewed here.

Nevertheless, it must be noted that as of 15 July 2009 the government has to redeem NZD 3.8671 billion maturing, marketable notes.

The total redemption figure including the RBNZ (NZD 1.2869 bn) and EQC (NZD 0.656 bn) holdings is NZD 5.81 billion.

This raises the ugly question of what do the RBNZ and EQC intend to do with the cash? What asset class if any will these two institutions acquire between now and 15 July 2009? It must be recognised our coins and notes are theoretically backed (guaranteed) by the RBNZ's government note holdings.

Government debt with a coupon rate less than the 7.0% level attached to the expiring note would be fine by me. Anything else raises credibility issues.

Alert: 30/06/09 -' Indeed, it would seem that the majority of people do not understand the mechanics of interest rates. In response to a question about how many years it would take for a debt to double if the interest rate is 20%
per year compounded annually and nothing is repaid, only 36% of 1,000 respondents chose the correct option (“Less than 5 years”), and nearly 20% answered “Do not know”. See A Lusardi and P Tufano, “Debt literacy, financial experiences, and overindebtedness”, NBER Working Papers, no 14808, March 2009.'

The above is a footnote from the BIS Annual Report 2008/09. Read more.

For those seeking a rough solution to the question, calculate 1.20^5 = 2.4883. Then mutilpy 4/5 by 2.4883 = 1.9906. Hence the answer is ~four years.

Alert: 27/06/09 - Given the latest Federal Reserve Statistical release for large commercial banks' holdings of Treasury and Agency securities it would seem they [banks] rescued the 10 year notes from falling into the abyss of 4.00+ yields over the week ending 17 June. Click for a graphical view.

Unfortunately these purchases are a fraction of what is needed to place forecast issuance without causing market dislocation for US and hence all sovereign bond markets. Read more.

Alert: 25/06/09 - Withering 'green shoots' need some liquidity. Read more. I guess the easy pickings of financial market reflation are over.

And yet somebody has to underwrite the wall of sovereign debt issuance. Any inducement will suffice as long as it's another's liability. Taxpayers are destined to endure many vicious circles.

Bank of England governor Mervyn King bluntly says as much. Whereas, our own governor, Dr Bollard, an ex Secretary to the Treasury, could hardly be expected to tell it how it is.

Alert: 17/06/09 - RBNZ notes Downturn may be nearing end, but recovery not assured.

Recovery with a price tag of USD ~ 14.0 trillion in the USA, alone, hardly assures anything.

Read more in this FDIC account, especially the financial support summary laid out on tool bar page 4.

Alert: 1/05/09 - NZ taxpayers become the first casualty of Dr Bollard's imprudent intention to cap the OCR at or below 2.5% until the later part of 2010.

As I pointed out only yesterday - (see Alert: 30/04/09 below) -" I firmly believe unsupported central bank forecasts of low rates as far ahead than is credible will actually cause longer term rates to rise".

The NZDMO had to wait just one day to feel the pain after paying 5.33% to raise NZD 50 million at the 15 Dec 2017 maturity tender.

Unfortunately for them and us this rate was 14.716 bps higher than the interpolated swap rate (5.1828%).

Recent historical NZDMO issuance levels and associated swap rates can be viewed on this spread sheet. Today's tender details start at line 1108. Equally, today's official NZX/ANZ swap data can be viewed here.

Alert: 1/05/09 - A current account deficit blowout beyond the current term of this National Government?

The NZ Herald observes - "Chinese wealth fund interested in taking a stake in Fonterra, says Key".

It is little wonder that Fonterra is being prepared for sale, with the consequent repatriation of dividends offshore for evermore.

My recent alert noting Fonterra's latest interim financial results were published without the imprimatur of an accountant signalled trouble ahead.

Belatedly, a recent Mar 09 National Bank rural report highlights the poor state of Fonterra's equity.

The mainstream reporting sector were slow to pick up on the thorough disclosure made at this website forecasting the demise of the cooperative model for managing an industry accounting for 30% of exports. Too late now.

An unfortunate legacy of the Labour government only to be compounded by Mr Key's laissez-faire wllingness to sell off more of the family silver. The centrepiece no less.

One would have thought a potential Knight of the Realm would wish to see the ownership of wealth creation based here rather than over there.

Alert: 30/04/09 - RBNZ Governor Dr Bollard confirmed , without recourse to inflation levels, his intention to cap the OCR at the new level of 2.5% or lower out to the latter part of 2010.

This maybe great news for those thinking to finance purchase the potential wall of longer dated government debt issuance in the repurchase agreement (Repo, RP) market.

Nevertheless, there are certain risks to this strategy. Currently, the spread between the General Collateral (GC) rate (2.5%) and the NZ government 2017 note is 2.8% versus 2.39% yesterday. This is a level that could possibly cause a trader to bid more aggressively at the NZDMO term note tenders - to borrow short and lend long.

One would hope the widening of this spread will lead bidders to be more enthusiastic than last week, when a shorter dated 2011 NZDMO tender found only two bidders while the spread between GC and the market rate of the note (3.5%) was a paltry 50bps. This spread has widened to 95bps after today's OCR rate cut because the note yield moved down a measly 5bps.

It is obvious that inflation expectations have not diminished to the extent that Dr Bollard expects and herein lies the risk. I firmly believe unsupported central bank forecasts of low rates as far ahead than is credible will actually cause longer term rates to rise. Hence dealers will find it more attractive to spread sell or borrow (repo) to sell longer dated debt to buy duration matched short paper such as Tbills. This will force up the general level of term borrowing costs for all participants.

Furthermore, the introduction of repurchase agreement fails fees, as high as 3.0%, in the US Treasury market on 1st May 2009, will exacerbate this trend. Historically US dealers have been able, without penalty, to fail to deliver borrowed (repoed) securities sold short. Read background material here, here and here.

The upshot is US Treasury dealers will demand higher yields to compensate for having to desist from borrowing securities to sell short in the repo market to accommodate the purchase of an estimated USD 2.0 trillion US Treasury debt issuance programme.

Our term debt structure is heavily influenced by the yield on US ten year Treasury notes, which today broke above the significant 3.05% yield resistance level to close around 3.09%. Read more.

Alert: 18/04/09 - The inevitable consequences of zero to negative real return interest rates and blowout budget deficits: -

The sizable increase in demand for US Federal Reserve notes last year ($61.1bn) and continuing at a slightly higher annualised rate this year has caught the attention of the authorities.

The Federal Reserve has just released a frightener video extolling the virtues of maintaining a bank account, no doubt aware that a burgeoning black market economy means fewer deposits and ultimately less recognisable taxable income.

The recent growth in note demand is graphically presented and commented upon by the Federal Reserve on toolbar pages 34 & 35 in their 2008 Open Market Operations annual report. Further weekly statistical evidence can be found here in column one.

Alert: 14/04/09 - Should alarm bells be ringing?

I should say so, at the highest levels.

Fonterra, our most significant exporter deemed it necessary to dispense with the approval of an accountant's report in it's final version of the 2008- 09 interim accounts.

Independent review and approval of the presentation of the accounts was sought and published in previous interim reports. View 2007 and 2008.

Were the most recent results ' marked to model' by the directors and the previous accounting firm declined to associate itself with the release? I guess we will never know.

Independent analysis of Fonterra's results published at this website points to an unfortunate financial outcome.

One would hope NZX will investigate on behalf of investors who were recently gulled into buying NZD 800 million of Fonterra debt just prior to the release of the interim results.

Is it not common sense to assume rating agencies would demand to see the results of an independent accountant's financial review of the state of a corporation's financial affairs before issuing a credit risk assessement? Especially before a substantial debt raising exercise.

Alert: 8/04/09 - NZDMO fails to successfully close out an unusual trading odyssey.

Inexplicably the Debt Management Office recently tap issued three NZD 50 million tranches of the 7% 15 July 2009 notes at a weighted average yield of 3.2%.

Today it offered to reverse tap tender NZD 300 miilion of this same issue. Unfortunately for them and the taxpayer bids ranged from 2.85% to 3.01%.

A total of NZD 50 million was accepted at 3.01%. A 19 basis point loss for the taxpayer and a bloodied nose for the DMO.

I must point out it is not unusual to redeem portions of a maturing issue ( NZD 4.247 billion, in this case) a few months ahead of redemption in an attempt to smooth cash flows. But to issue more just ahead of a significant redemption is unheard of, unless the authorities were bailing out a third party short squeezed trader.

I guess we will never know and just have to accept that someone has had their hands in our pockets.

The only good news to come out of this debacle is the low cost of yesterday's treasury bill issuance.

Alert: 26/03/09 - Bidders at today's NZDMO government note tenders decided to take the taxpayer behind the woodshed for a good beating.

The release of the not so good latest current account deficit data just ahead of the tenders set the stage for dealers to make the cash desparate government pay.

The accepted bids for all three different maturities were 20 basis points higher than the end of day closing secondary yields.

And in the case of the 2017 note the issue price was 77 basis points higher than last week's tender yield.

Historical issuance data can be viewed here.

Moreover, IMF demands for the RBNZ to further lower the Official Cash Rate (OCR) and initiate a programme of quantitative easing hardly supports New Zealand's cash raising efforts in a world acutely short of such a commodity.

Printing money when the nation has net foreign liabilities of NZD 167.7 billion (92.9% of GDP) is not acceptable to us never mind our creditors.

Alert: 19/03/09 - US Federal Reserve has taken the huge step towards hyperinflationary monetary growth. Read more.

Monetising the US Treasury's significant debt issuance programme (est. USD 2 trillion) should ring alarm bells for all those with savings and will set off a stampede to purchase hard assets.

Visions of the Weimar Republic come to mind.

Let's hope the RBNZ and NZ Treasury are on top the situation. All open unhedged short NZD/USD currency pair positions should be closed and USD reserves exchanged for other currencies.

Alert: 10/03/09 - Stuff reports - ' Moody's warns over Govt debt'.

As a consequence NZDMO pays 2.99% at today's 3 month T Bill tender. Five bps more than last week. Graphic details can be viewed here.

Alert: 5/03/09 - Australian government pays more than our own to raise 3 month and 6 month Treasury debt. Read more.

Earlier this week the NZDMO paid 2.94% for 3mth bills (Aus. 3.06%) and 2.90% for 6mth bills (Aus 2.92%). View recent N.Z. debt issuance here.

Alert: 2/03/09 - NZDMO data release confirms the government has raised NZD 4.198 billion in new debt over the last three months.

On an annualised basis this would represent the thick end of NZD 17.0 billion in new taxpayer liabilities - much greater than forecast.

Surprisingly, none of this money is apparently being spent directly into the economy, if the latest RBNZ D10 release is to be believed.

The sharp Jan 09 run up in FX Swaps and Basis Swaps noted in section 10 of this release suggests the government has committed the borrowed money to bank deposits in return for foreign exchange reserves via cross currency basis swaps.

Dare I say the majority of taxpayers are partially funding the cheap mortgages of the few?

Alert: 6/02/09 - The Vulture Culture.

Brendan Clegg of CBD Realty said it was not unusual in retail property to get a 100 per cent increase over five or six years. Read more.

A briefing paper for the incoming health minister, prepared by the Crown Health Financing Agency, predicts the health system will be $1.6 billion in the red by the end of the 2010-11 financial year if inflation continues at its current level. Read more.

Is it not time for Mr Key and his men and women at the RBNZ and Treasury to construct an adequate measure of rising costs that reflects reality rather than the emasculated anachronism labelled CPI?

It will be the rising costs of imported materials necessary to service our basic needs and the cost plus plus mentality of local 'business' that will crucify our competitive export edge and decimate our health services.

Official endorsement of the reduced purchasing power of the NZ dollar depicted here must be rescinded. Collective penury of this magnitude is unacceptable serfdom, for those not personally responsible (our children).

History is littered with the ideology of false Gods. Read more.

Alert:4/02/09 - RBNZ declines to rollover the total amount of NZD 975 million RB bills maturing today. View graphic details here.

These bills were meant to sterilise the TAF liquidity injections undertaken by the RBNZ to alleviate the banks' offshore funding difficulties, thereby protecting the purchasing power of our dollar.

To be fair the Government through the offices of the NZDMO has recently initiated a programme of significantly higher debt issuance, which more than offsets the RBNZ's actions. For the month of January 2009 net new market issuance raised NZD 1.3 billion in addition to NZD 1.51 billion raised last December 2008. Details can be viewed here.

No matter how low interest rates fall there are always new debt servicing liabilities requiring payment from our diminished incomes.

The Australians are certainly pacesetters on this road to ruin. Read more.

Alert: 30/01/09 - NZDMO pays 5 bps through interpolated swap rate at the 15 April 2015 note tender. View details at the last entry on this xls sheet here. Treasury unease at this mispricing of the swap curve caused them to cut back on the offered stock to succucessful bidders from NZD 50.0 million to NZD 24.0 million.

Please note my concern about swap interest rate pricing in the comment immediately below.

Alert: 29/01/09 - The fallacy of our interest rate market pricing mechanisms.

Today, Treasury Secretary John Whitehead reduced the fees for the Wholesale Funding Guarantee Scheme.

“The cost (the margin above comparable government issued debt) of raising term funds by banks in other countries, operating under their guarantees, had proved much higher than anyone had expected. It is appropriate to reduce the guarantee fee, and for the cut to be focused on the terms beyond one year,” Mr Whitehead said.

And yet every day our banks and or their accomplices fix the NZ swap curve barely above our NZ government bond curve. And in fact the interpolated 10 year rates trade at par. Review my previous comments and examples here.

There is a significant element of self interest at stake since the local swap rate is the main pricing/hedging mechanism for fixed rate mortgages. Realised price discovery at a funded rate above the unfunded index swap rate would surely lead to higher mortgage interest rates and cause local captive depositors to seek parity, rather than accepting below wholesale funding rates.

I consider the RBNZ is complicit in this deceit when the RBNZ Governor Dr Bollard acquieces by reducing the OCR to match which is largely a manipulated lower swap index rate.

Just in case you find this all a bit incredulous read the BNZ's latest justification to further manipulate interest rates lower.

I for one do not wish to be unduly penalised to bailout reckless borrowers and their imprudent bankers when professional lenders will not.

Alert: 22/01/09 - The Prime Minister finally requests the Renumeration Authority to freeze MP's salary. Read more.

Hardly a tough call when the interpolated yield (4.1247%) of the 2015 and 2017 government note issues to match the maturity of inflation index linked 2016 notes has narrowed to 57.47bps over. View NZX secondary market pricing here.

A market implied inflation rate of close to half a percent calls for action by other price setters considering gouging the citizens going forward.

Alert: 15/01/09 - Today's NZDMO note tender confirmed an unseemly and possibly disorderly stampede to lock in collapsing term yields. The details of which can be viewed at the last entry of this xls link.

It is notable the yield (4.30%) on the NZ government note maturing 15 April 2015 matches that of the interpolated swap yield for the same duration.

Given that the yield of the fixed side of a plain vanilla swap represents the semi-annual bond equivalent of a string of term FRAs (forward 3 month bank bill rates) it would seem impossible that the compounded rate equals that of government risk.

And in fact when it comes to funding, the Australian parents of our banks do pay considerable premiums over the fixed swap rate. ANZ recently raised AUD 1.5 billion for a five year term and paid 110 bps over the mid swap quote. Read more.

So who is driving the unfunded swap yield below the funded market level, speculators, our banks and for what purpose?

Are they or the IMF and World Bank orchestrating a universal outcome of near zero percent interest rates to recover the now discredited borrow and consume model of capitalism? Whomever you elect the ruination of the middle classes is firmly in their sights.

For instance, imagine the meagre weekly payout from a pension annuity at near zero percent interest rates.

And forget the stockmarket as a means of capital recovery. Robert Shiller's xls file available from this link clearly shows that real dividend returns take upwards of 30 years to double. Read more.

8/01/09 - The recent sharp drop in government T bill yields and the widening of the bank bill spread against them signals trouble in paradise. View graphic details here. and data here.

6/01/09 - The Key Government raised NZD 1.51 bn of the projected NZD ~40.0 bn debt increase, out to 2013, in December 2008.

Such haste seems to have ignited unwanted foreign interest in buying NZD to settle the purchase of this debt. View graphic details here.

The law of unintended consequences and vicious circles come to mind.

31/12/08 - A Hat tip to the Herald's Fran O'Sullivan: 'Time for our leaders to prune their pay'. Read more. Our children will foot the bill.

20/12/08 - The Federal Reserve, the Bank of England, the Bank of Japan, the European Central Bank (ECB) and the Swiss National Bank have announced schedules for term auctions of U.S. dollar liquidity to be conducted during the first quarter of 2009. Read more.

I guess the current scale of US primary dealer deleveraging must be frightening someone. View the graphic details here.

An explanation of repurchase agreements (RP) can be read here.

19/12/08 - He of little shame. A new Policy Targets Agreement signed by Finance Minister Bill English and Reserve Bank Governor Alan Bollard has been released today.

For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 percent and 3 percent on average over the medium term. The same as the old agreement.

What part of 1-3% does the Renumeration Authority not understand when awarding MPs and judges the thick end of five percent pay increases?

Such hubristic profligacy has been priced in the yield spread between NZ and US 10 year government notes. Since early October the spread has widened 89 bps from 187 bps to 276 bps. NZ over.

The cost of financing the projected government deficit blowout over the coming years will not be cheap, for most of us.

Alert: 16/12/08 - Further to the RBNZ's announcement to extend it's eligible securities list (collateral for TAF and reverse repo liquidity injections) to include corporate debt it added it's own debt in the form of RB bills.

Monetising one's own debt is the AAA version of premier pyramid schemes.

Under the accounting rules of repurchase agreements these so-called sterilisation securities issued by the RB to offset previous 'thin air' liquidity injections against other eligible collateral will in turn be monetised and will not be withdrawn from the cash recipient's balance sheet.

Shades of Mr Madoff's scheme, but with a "get out of jail free" clause. View the latest RB bill issuance here.

Alert: 16/12/08 - Britain's CBI demands review of £1tn public sector pensions bill. Read more. Is the situation better here? I doubt it.

Alert: 16/12/08 - For those perplexed by the the fact that zero and in some cases negative returns are being received by 3 month US Treasury bill investors while the USD is losing value, look no further than the latest US Treasury International Capital data report for an explanation.

Alert: 4/12/08 - Predatory Lenders' Partner in Crime by By Eliot Spitzer, ex Governor of New York. How the Bush Administration Stopped the States From Stepping In to Help Consumers. Read more.

I guess Dr Bollard's barely disguised threat exhorting banks to pass on lower wholesale interest rates to their customers is a belated effort to redress past indiscretions commited by our own banks. To suppose otherwise would negate the reason for a 150bp OCR cut. No?

Alert: 4/12/08 -The mayor of Birmingham, Ala., has been arrested on multiple charges of corruption stemming from the issuance of bonds and debt swap agreements that could lead to the largest municipal bankruptcy in American history.

Earlier this year Bloomberg revealed the sorry details in this report.

One can only hope the NZD 347.394 billion outstanding interest rate swap positions declared by ANZ National Bank on page 33 in their latest General Disclosure Statement have more savvy counterparties than the mayor from Birmingham, Alabama.

Local Authorities and SOEs spring to mind as possible counterparty candidates after Dr Bollard pointed the finger at them for persistently raising their levies.

ACC is another possible casualty of derivative trading losses. The Finance Minister should inform us of the cause of our new liabilities rather than blaming Labour for non-disclosure.

Alert: 3/12/08 - RBNZ injects an additional NZD 500 million liquidity into the banking system via the TAF facility. The same recipient banks monetised NZD 500 million RB Bills to sterilise the injection. A graphical view of outstanding open market operations can be viewed here.

Alert: 27/11/08 - We have the first published casualty of sharply falling interest rates.

Stuff reports "Capital Properties NZ Ltd, a commercial property investor managed by AMP Capital Investors, has notched up unrealised losses on interest rate swaps."

A loss of NZD 9.14 million was recorded in the nine month period to 30 September 2008. Imagine how big that loss has grown since the RBNZ cut the OCR by 100 bps on 23 October 2008. A quick review of 5 year Government stock rates published here offers some insight. If you are not sure what this means read on.

Banks, the world over, encourage corporate clients to fund investment, working capital etc with short term 3 month loans and then undertake paying the fixed side of a longer tenor interest rate swap.

The banks are contracted long duration receivers of the fixed side of the swap while the corporate is the receiver of the floating side. The latter hedges the short term bank loan cost.

All this is presented as a means for the corporate borrower to know what it's longer term cost of capital will be and plan accordingly.

But they unwiitingly end up short duration (paying the fixed longer term interest rate level) via the swap in a falling interest rate market and are unable to adjust the cost of capital to remain competitive and will go bankrupt. Or near as.

They, the corporates, will have to lay off staff and possibly sell off assets at fire sale prices to contain costs and recover losses.

Alert: 26/11/08 - RBNZ injects an additional NZD 1.45 billion liquidity into the banking system via the TAF facility. Thankfully, the same recipient banks monetised NZD 1.50 billion RB Bills to sterilise the injection. A graphical view of outstanding open market operations can be viewed here.

Alert: 25/11/08 - It may not be apparent to all concerned, the RBNZ's TAF liquidity injection programme is a series of non-recourse loans collateralised by residential backed mortgage securities. View eligible securities list.

In plain English from Wiki:

A nonrecourse debt or non-recourse debt or nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral , typically real property, but for which the borrower is not personally liable. If the borrower defaults , the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the lender is simply paid out the difference. Thus, non-recourse debt is typically limited to 80% or 90% loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan. The purpose of non-recourse debt is to require lenders to underwrite their loans on a sustainable and prudent basis since the lender is in the first-loss position with these loans, not the borrower.

The RBNZ on New Zealand taxpayers behalf will be the first to lose money, not the profit making banking institution lending our liability. It must be clear to all, we, the public need board representation to protect the risk, not the excuse of a suspect AAA credit rating.

I certainly do not trust the selected, indebted citizens' ability to liquidate their liabilities anymore than foreign lenders, who previously bore the risk.

A graphical view of outstanding RBNZ open market operations can be viewed here. Note the banks have been reluctant to monetise RB bills to sterilise and completely collateralise TAF injections, to date, despite offers to do so.

Alert: 19/11/08 - RBNZ injects an additional NZD 1.5 billion liquidity into the banking system via the TAF facility. Thankfully, the same recipient banks monetised NZD 975 million RB Bills to partially sterilise the injection. A graphical view of outstanding open market operations can be viewed here.

Alert: 13/11/08 - RBNZ drains liquidity via short dated repo agreements to offset yesterday's TAF injection and more. Notably, not without cost to the taxpayer. The RBNZ is paying 6.4% on the submitted cash while yesterday's injection recorded a rough and ready weighted average return of 5.80%.

I guess the difference can be put down to the social cost of housing, or is it a cunning ploy by our banks to manipulate the current state of the interest rate curve? Answers should be sought from the new Finance Minister.

Alert: 12/11/08 - interest.co.nz says, 'Also fresh from being awarded a government [deposit] guarantee, PGG Wrightson Finance has announced plans for a NZ$75 million bond issue to mature on October 8, 2010, days before the 2 year guarantee is due to expire.

The bonds are being underwritten for up to NZ$50 million by lead manager Forsyth Barr. The bonds will receive an interest rate which is the greater of 8.25% or 225 basis points above the two year swap rate.'

The prospect of a debacle similar to the US Savings and Loans crisis comes to mind. Billions of dollars of higher yielding deposits were secured by FDIC deposit insurance and lent at the highest interest rate possiible consistent with the risk undertaken. Risks often declined by mainstream banks.

How can you blame our local operators when they see the obvious arbitrage possibilities created by government intervention? Many successful US investment banks employed arbitrage trading with great success in the past.

Oh to be a privileged cash rich client of Forsyth Barr.

Alert: 12/11/08 - The RBNZ has injected NZD 500 million liquidity into the banking system against eligible collateral.

And as you would expect, under the terms outlined last week, the same recipient banks declined to monetise the NZD 700 million RB bills offered to sterilise these brand new deposits and drain the system of excess liquidity.

So we have one set of assets (God knows whose mortgage) acting as collateral against two sets of deposits, that is, until another set of mortgages (assets) are created, then we have three sets of deposits (liabilities). As I said before it's a pyramid scheme. The fun starts, as we are finding out in the US, when each party wishes to secure the real assets in bankruptcy proceedings.

Alert: 11/11/08 - The first cost of the RBNZ's proposal (see Alert: 7/11/08) to inject weekly chunks of liquidity into the banking system has been realised for taxpayers.

The yield on the Treasury Bill tender undertaken by the NZDMO today rose 40 bps to 6.11%.

The chance of a significant cut in the OCR below 6.00%, on 4th December, looks slim if this up trend in short term government debt rates persists.

Alert: 7/11/08 - RBNZ announces US style TAF liquidity programme and concomitant RB bill sterlising issuance. View details here.

Our banks take up of RBNZ offered repo liquidity drains has been patchy in the past. Unlike US primary dealers there is no obligation to bid for the offered collateral.

So let's hope the RBNZ offer to guarantee the "Moneyness of Credit", obvioulsy declined by others, is taken in good spirit by the banks and reciprocated by acceptance of the sterlisation facility.

Otherwise we risk the outcome detailed in the Alert comment immediately below.

Rest assured this is just one of many hoops the authorities will jump through in their vain attempts to liquefy that which is unpayable.

The US Federal Reserve Governor, Mr Bernanke set out the blueprint as far back as November 2002.

Alert: 7/11/08 - The US Federal Reserve and Treasury drop any pretence of sterilising liquidity injections. As of Thursday's close net domestic injections surpassed redemptions, outright sales and cash mangement bill public auctions by a staggering USD 241.17 billion (view graph above left). The Federal Reserve has adopted an outright stance of monetising debts - PRINTING MONEY. One needs to look no further than this graph of high powered money to gauge the pending inflationary impact.

A refined view of the monetary base for registered depository institutions can be viewed here. And the formula for paying interest on these balances can be viewed here.

Alert: 30/10/08 - NZDMO registered government debt bidders ambush NZD 50 million 2017 note tender.

The DMO recently pulled a bond tender scheduled on 16 October 2008 due to market volatility - code for higher yields.

Not to be short changed dealers front ran today's tender with longer dated note short sales, totaling NZD 423 milliion. The short cover was obtained from the RBNZ bond lending and repo facility.

It certainly worked - today's weighted average successful tender yield at 6.02% was about 5 bps points higher than yesterday's secondary market 10 year yield.

The NZD value of 5bps on NZD 423 million 2017 year notes is approx. $ 1.4805 million. Pays a few salaries, but ups the national debt servicing cost going forward.

Alert: 29/10/08 - The New Zealand Herald's Fran O'Sullivan sees a currency crisis and calls for notable politicians and bureaucrats to form a war cabinet to address the problem.

I will just reiterate my previous sage comments and point you to the bottom left graph.

It would seem the US Federal Reserve, the financial representative of the defenders of world democracy, read Ms O'Sullivan's mind and placed USD reserves at our disposal to sell if and when we need to defend the NZD/USD currency pair. Read more

Alert: 28/10/08 - RBNZ - did it or didn't it lend NZD 100 million against RBMS or was it against the other equally eligible collateral?

We (the public) will never know.

As George Orwell's Animal Farm depicts - not all pigs are equal. The stark contrast of inequality is noted here.

Alert: 25/10/08 - Is the USD cross currency basis swap funding leg that underpins the foreign asset investments of The New Zealand Superannuation Fund (Cullen Fund) secure?

You may wonder why I ask this question. Well it was none other than the estimable Roger Kerr who confirmed that which I already suspected a while ago and had little luck in extracting a confirmation thereof, from Andrew Turner, an officer at the NZDMO.

Confused?, so was I for other reasons - non -disclosure being the main one.

For the same reasons our banks can apparently no longer access USD liabilities to fund new NZD mortgages through the arcane mechanism of Uridashi/cross currency basis swap deals, neither can the The New Zealand Superannuation Fund's counterparty, the NZDMO. The barest details of these arrangements, without explanation, can be viewed on page 24 of this PDF file.

Please demand an explanation for no other reason than taxpayer's dollars to the tune of NZD 13.0 billion, minus the Super Funds NZ assets, were more than likely crafted into mortgages by the NZDMO's counterparties - our banks. Borrowing to pay taxes is another example of a ponzi scheme dedicated to indentured servitude.

Maybe, I should have added another $16.0bn, after including the crown surplus, to this chart.

Alert:25/10/08 - RBNZ approves purchase of ANZ and Westpac residential mortgage -backed securities (RMBS) as collateral for cash in reverse repurchase open market operations - read more.

This action in the reported size of NZD 8.7 billion per bank indicates serious stress given there is a 19% collateral haircut penalty. A total of NZD 41.41billion of RBMS would need to be submitted to receive cash injections of NZD 34.8 billion if all four Australian banking pillars were involved.

Thin air cash injections - PRINTING MONEY - of this size are extremely inflationary unless there is a sterilising offset sale of government debt undertaken by the NZDMO.

The unreported accounting anomaly of these reverse repurchase agreements, proposed by the RBNZ, is that the individual mortgages underlying the RBMS packages remain recorded as assets on each banks' balance sheet, while at the same time they are recorded on the RBNZ on or off balance sheet as an asset against the cash liability given to the banks to create new mortgages. A pyramid scheme by any other name...

It was, and still is, the astronomical size ($trillions) of these transactions undertaken by private parties in the United States that caused the catastrophe we are now witnessing. And yet it's the same 'old medicine' that gets prescribed by the bureaucrats.

For those readers who need to understand the mechanics of repurchase agreeements, may I suggest a review of the material in the following links: IMF Repo Accounting Examples, Full Article

Alert: 13/10/08 - Infinite Fiat - The Federal Reserve has just announced:

“The BoE, ECB, and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for full allotment. Funds will be provided at a fixed interest rate, set in advance of each operation.

Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction.

Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded.

The Bank of Japan will be considering the introduction of similar measures.”

It would seem all taxpayers world wide are deemed to be rated AAA irrespective of their collective failure to liquify previous liabilities.

Alert: 12/10/08 - The Minister of Finance announced today that the Government has introduced an opt-in deposit guarantee scheme.  The scheme covers deposits for New Zealand-registered banks and eligible non-bank deposit-takers (including banking societies, credit unions and finance companies).

I suppose those following the RBNZ's example of selling NZDs overwhelmed those institutions trying to rollover funds sourced offshore to finance our indulgence in real estate. As always, it's a case of be careful of what you wish for.

Furthermore, watch out for Tier 1 & 2 capital raising exercises so 'local' banks can fund domestically, at lower deposit rates, thus forcing government guaranteed depositors to subsidise these foreign owned entities.

And please do not tell me no one could have foreseen the circumstances surrounding these extraordinary moves. Outstanding CDS contracts stood at USD 62.00 trillion written on issuance of USD 6.00 trillion bonds world wide, as of June 2008. A little leverage maybe, possibly gambling? And hardly a cents worth of provision for capital reserves against losses. Where were the regulators? No where to be seen while it was all profitable.

Just in case you thought this was Dr Cullen's bright, independent idea, think again.

Alert: 9/10/08 - RBNZ announces “To further improve liquidity prospects for the banking system, we are announcing that the Reserve Bank will temporarily broaden its security programme. We will, if required, be prepared to lend on the basis of fully-secured Residential Mortgage-Backed Securities (RMBSs), prior to those securities achieving formal ratings.”

Back in May 2007 when Dr Cullen, the Finance Minister, was heaping praise upon Dr Bollard, as he re-appointed him for another five year term, I had occasion to send, in graphic detail, my concern about his performance over those previous five years.

Alert: 9/10/08 - I don't believe it. The WSJ, that venerable supporter of free market monetarism advocating a return to the the gold standard. Note in the bottom left graph how poorly the NZD is performing against the supposedly anachronistic value of wealth.

Alert: 3/10/08 - Surprised by recent USD strength. Don't be! World central banks bought and unprecedented amount of US Treasury securities over the last week. $ 46.0 billion in fact. For general convenience find a graphical representation of weekly changes for central banks' custodial holdings at the Federal Reserve here.

Alert: 30/09/08 - Pyne Gould Corp, a New Zealand holding company that owns Marac Finance Ltd., said it will seek a license to become the only locally based, publicly traded bank.

Make no mistake, this a New Zealand Government bailout prior to the election, but without the local public debate that US citizens were seemingly entitled to when their lawmakers were considering a bailout for US financial institutions.

As I previously noted further down (Alert: -22/09/08 ), if Pyne Gould Corp gets RBNZ approval to trade as a bank, we the taxpayer will have to bail them out when they stand in line to exchange all manner of failing assets in exchange for cash at the RBNZ's open market operations window.

Alert: 30/9/08 - While US lawmakers have rejected the USD 700.00 billion rescue plan, the US Treasury has made good on it's promise to bail out the banking industry regardless. Under the auspices of this little quoted announcement the Treasury will have issued a net USD 400 billion cash management bills at week's end and transferred the proceeds to the US Federal Reserve to intermediate as it wishes. The light blue band on the top left chart depicts the issuance to date.

Alert: 25/09/08 - Rasipedia - a humorous yet sobering outline of the unfolding US financial crisis to date. One doesn't know whether to laugh or cry.

Alert: 22/09/08 - RBNZ embraces the dubious duty of guaranteeing the "Moneyness of Credit", the calibre of which we have to guess.

Following last Friday's revelation that the RBNZ would add bank paper to the list of acceptable collateral for loans ( reverse repo) conducted during open market operations, we are confronted today with the dilemma of the two allocated deals being one of four unidentified choices: - Bank, LA, SOE, CP. View here.

The first three certainly meet acceptable levels of risk known to all New Zealanders, but what about CP? Are taxpayers lending money against GE and Toyota's car and consumer durables financing loans? View RBNZ collateral list here.

What is the collateral Mr Spencer? - AAA rated corporate paper or not. I certainly do not trust the credit ratings issued by the rating agencies since the housing related CDO, CLO, CDS debacles.

Alert: 19/09/08 - It is not often that I deviate from matters purely financial, but I found this Spectator article compelling reading in front of our own election.

Alert:25/07/08 - Yesterday the RBNZ Governor cut the OCR 25 bps thus shaving the same off local banks' deposit rates. Today National Australia Bank, owner of our local Bank of New Zealand, announces ~ NZD billion write down of CDO assets.

As Bloomberg noted - The risk of National Australia Bank defaulting on its senior debt gained 12 basis points to 90. The swaps are now about 2 basis points wider than contracts linked to ANZ Bank and 5 basis points wider than Commonwealth Bank, according to JPMorgan. The later all have sudsidiaries forming the core of New Zealand's banking industry. Click here for a screen shot of today's largest widening CDS spreads. What is a CDS?

As we have all witnessed, the local non-bank finance industry has all but collapsed without adequate interest rate compensation for the risk undertaken by depositors.

Either, leaving under arm bowling aside, the RBNZ is woefully under informed, by the Reserve Bank of Australia, of the financial state of the parents of our own banks, or neglectful of it's responsibility to safe guard our assets (deposits) at least by way of higher interest rates. Unlike Australia our government, correctly in my view, declines to augment or offer deposit insurance.

As the RBNZ Governor rightly noted, 'today's cut will help to mitigate the effect of these (banks' rising cost of funds) increases on the actual borrowing costs paid by firms and households'.

Well they (funding costs) should be rising and so should depositors' returns, to compensate for the risk attached to the less than forthright prior disclosures of losses belonging to the owners of NZ banks taking these deposits.

Alert:5/07/08 - Earlier this week Associate Finance Minister Trevor Mallard was noted in Stuff suggesting the government was considering expanding or changing the range of tools available to the RBNZ to fight inflation. He went as far to say:

"For a number of years ... inflation has been driven by increased domestic demand that stems from a buoyant housing market, fuelled by cheap foreign capital attracted by a stable economy and relatively high interest rates.

"Now we have inflation challenges driven by record high international prices of food and oil. In both cases the tools available to the Reserve Bank have not been able to address those problems.

"In fact, in the first case it could be argued that they (RBNZ) exacerbated the problem."

Mr Mallard's casual reliance on sophistry masquerading as reasoned central bank policy debate cannot pass unchallenged.

First, the RBNZ exacerbated the problem! - so does the government. Is the minister unaware that government cash surpluses are lent to New Zealand banks by the RBNZ via cross currency basis swaps?

As of 30 May 2008 this sum was in the region of NZD 3.8 billion, according to RBNZ statistical releases. Netting lines 8 & 10 totals on this page provides a rough guide. And to which sector of the economy do the banks on lend this government largesse? Housing mortgages of course. Where else to find a collaterallised borrowing market in New Zealand? This sum just gets tacked on to the pool mentioned by the minister, depicted in the charts here.

Second, the government authorised the RBNZ to intervene in the foreign exchange markets, unheeding of the catastrophe endured by the UK Treasury at the hands of George Soros.

Nevertheless, the RBNZ waded in, beginning June 2007, selling NZD, presumably against USD. See the graph immediately above to your left and the woeful returns from this activity in the linked spread sheet.

But, more important to those responsible was the unsterilised NZD ~ 4.00bn injected into New Zealand banks' deposit ledgers.

The liabilty had to be matched by an asset. The RBNZ indicated the FX invervention strategy was a long term cycle trade. So where better to lend $4.00bn than the housing market? It's two assets by the way - the recorded mortgage and a lien over the property - but that's another story.

So who is and still is responsible for the thick end of NZD 8.0 billion government controlled funds supporting the price of a good often confused as investment rather than consumption? The associate finance minister or the RBNZ? I suggest both and in my view Dr. Bollard should know better.

Thrid, what tools is the minister thinking of removing and possibly adding to the RBNZ's inflation fighting arsenal to combat as he puts it - record high international prices of food and oil? The RBNZ has canvassed various possibilities here. Let's hope he rules out cutting interest rates too drastically by default changes to the policy target agreement. A quick perusal of the recent course of the red plot in the New Zealand Dollar Value chart emphasises the current dire condition of our dollar's buying power against a commodity index product such as gold. The collective force of further currency intervention, commodity price rises and lower interest rates would unleash at best an unseemly slump into hyperinflationary poverty for the average New Zealander.

Archive

Alert:8/02/06 - The Reserve Bank made public today, under the Official Information Act, a briefing on recent NZD Uridashi bond flows (PDF 128KB), prepared prior to meetings between New Zealand and Japanese officials in December 2005. Readers can view my take on the situation as far back as November 2004 here.

Alert:20/1/06 - NZD - 'Good as Gold' ? No, it is just steadily slipping away, following orchestrated media scare tactics. Nevertheless, the RBNZ governor will have to deal with the ensuing inflationary consequences if the trend continues. Historical uridashi and eurokiwi issuance versus the NZD/US currency pair can be viewed here. It should be noted that invariably within the structure of uridashi and eurokiwi issuance our own banks are borrowing USD to lend via a swap (See flow chart) to the international borrower of NZD. The foreign investor acts only as an FX hedge to both borrowing parties. And I am sure the foreign NZD investors feel comfortable that the exchange rate risk is built into the price of the products we import from them. Equally, the New Zealand government is not an innocent party when it comes to creating bank liabilities from fiscal surpluses that have to be matched by new mortgages

Alert:11/14/05 - End of M3: Not Exactly - Tom Yarnall, previously the author of The Monetary Letter, proffers his informed opinion on the Federal Reserve's decision to cease the release of M3, RP and other data at the end of the first quarter next year.

Alert:9/28/05 - Readers may wish to read an FRBNY article authored by Fleming and Garbade entitled Explaining Settlement Fails. It may prove instructive when reviewing the Federal Reserve's Securities Lending Operations page.

US Federal Reserve Reference Publications

"The market for repurchase agreements on US government securities is of vital importance to the New York Fed, and the whole Federal Reserve System, because it is where virtually all of our monetary policy operations are conducted."- Peter Fisher, Manager, System Open Market Account - 15 January 1997.

"Open market operations are not another weapon in the Fed's arsenal, but the only weapon in its arsenal." - Monetary Trends, St Louis Federal Reserve, August 2003.

Repurchase Agreements with Negative Interest Rates - FRBNY - A primer detailing how short sales of Treasury securities can lead to protracted RP fails and consequently negative rates to address capital requirement issues.

OMO-Repo Misuse - Letters to Hon. Dr. Michael Cullen, N.Z. Minister of Finance.

Repo Transaction Accounting. Letter to Mr A. Orr, RBNZ.

IMF Repo Accounting Examples, Full Article

NZ Debt Management Office Uridashi issue and associated EuroKiwi letters to Hon. Dr. Michael Cullen, N.Z. Minister of Finance.

Record Uridashi Issuance.