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Derivatives

Maturing Debt Set To Boost Kiwi Credit Mart

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The New Zealand credit derivatives market is likely to pick up dramatically as fund managers look to reinvest cash from a heavy flow of maturing government debt.

The New Zealand credit derivatives market is likely to pick up dramatically as fund managers look to reinvest cash from a heavy flow of maturing government debt. "There's a lot of liquidity in the market and a lack of diversification," said an official at National Bank of New Zealand. One issue totaling NZD2.5 billion (USD1.6 billion) matured mid-February, while another of around the same size will be redeemed in the fourth quarter, which is more than double the amount due over the last few years.

"There are a lot of fund managers starting to change their mandates so they can look at such products," he said. In addition to feeding greater demand for credit-linked notes, NBNZ is considering offering CDOs this year, for which it would likely partner with an international house. "These are more well-known now," he said, explaining why it has not offered the structures before.

"There will be a greater take-up of structured assets," concurred Fergus McDonald, head of bonds and currency at Tyndall Investment Management in Auckland, who runs a NZD2.1 billion fixed income portfolio, adding, "These are becoming a part and parcel of the New Zealand market." McDonald said the fund is considering allocating a part of the portfolio to credit derivatives on Australasian names that traditional domestic clients would be familiar with, such as banks, declining to further elaborate on potential investments.

Also, the synthetic credit market is likely to gain in coming years as government debt issuance is tipped to decrease. "The government is running at a surplus," McDonald noted, explaining that as a result, issuance will slow. He continued, "This will cause a scarcity of debt investments."

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