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



Reserve Bank Governor or Just Another Impotent Empiricist?

8 November 2004

I, like other financial market observers, was perplexed by Reserve Bank of New Zealand Governor Dr. Bollard's view that there were no compelling reasons to signal further Official Cash Rate (OCR) rises, after the 25 bps hike on 28 October 2004. This decision was in direct contrast to the hawkish statement accompanying the same rate rise on 9 September2004. The Bank stated then that further tightening of monetray policy was likely to be required and Dr. Bollard said... " looking ahead we do not have much inflation headroom, which is why we are continuing our incremental tightening of monetary policy."

What happened during that seven week period to force such a radical change of view?

My contention is that a NZD 1.6 biilion (updated to $2.12 billion, 26 November) orgy of structured finance issues (see Dow Jones press comment) similar to the National Australia Bank (NAB) deal, set out below, were arranged by our foreign owned domestic banks to negate the prospect of higher domestic mortgage rates following the September pronouncement.

NAB sells NZ$315 million uridashi debut
(13 October 2004)
National Australia Bank
Sector                             Corporation (financial)
Issuer rating                 AA-/Aa3/AA
Facility                             Fixed rate EMTN uridashi
Amount                          NZ$315 million
Launch date                  11 October 2004
Maturity                         26 October 2007
Set date                         26 October 2004
Coupon                          6.00 per cent
Issue price                   100
Arranger                       Citigroup
Seller                             Nikko Cordial

Uridashi means capital issues destined for private investors in Japan on a secondary re-issue basis, whereas Eurokiwi issues are generally destined for European private investors, i.e. "The Belgium Dentist". Kauri bonds are issued in New Zealand and some issues are acceptable as collateral for RP operations conducted by the RBNZ. Otherwise, they all share the same characteristics - more detail here and here. The RBNZ published (June 2008) a workshop paper entitled 'The Development of the Kauri bond market'.

Click for a larger image     Source: RBNZ

Click for a larger image     Source: RBNZ

The unstated objectives of these issues is to secure cheap N.Z. dollar bank liabilities to on-lend to New Zealand fixed term mortgage borrowers at costs significantly below prevailing rates, thereby undermining the Reserve Bank's intentions to cool speculative house price rises-see fig 1;

Fig 1:

Click for a larger image - then F11 and enlarge button for lower resolution screens

Click for a larger image    Source :REINZ

And moreover, force the value of the NZD higher to reduce imported inflation that would diminish the need for further interest rates increases to contain domestic CPI pressures.

click for a larger image

New Zealand domestic banks, like their counterparts all over the world, realise that initial mortgage loans make no provision for compounding interest payments on principal. Any attempt by the authorities to raise the cost of servicing mortgage loans naturally reduces the credit in circulation necessary to bid up asset prices. Unless further credits (Iiabilities) are issued.

Charts updated NZT 19 December, 2015 10:16 PM

The Reserve Bank of New Zealand published an article, in their September 2005 Bulletin, by Drage, Munro and Sleemam entitled An update on Eurokiwi and Uridashi bonds.

8 February 2006 - Briefing released. 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.


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OMO Matters

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.

Reserve Bank of Australia repo eligible, basis swapped, foreign issued AUD debt - read here.

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.