Budget 2009 involves borrowing on a scale not seen since the 1980s. The government’s Debt Management Office (NZDMO) will issue more than $8.5 billion in bonds during 2009/10 and a net $36.9 billion out to 2013.

But this borrowing is seen as acceptable, even by the credit rating agencies, given its focus on enhancing the productive side of the economy by improving its infrastructure.

Speaking with officials from the NZDMO, the bond issues will be carried out through their regular tender schedule, using their standard range of bonds. The longest term government bond currently planned matures in 2021. According to the definition of bond maturities used in the London gilt market, a long bond is defined as having 15 or more years to run*. That is, New Zealand’s longest bond is actually a medium-term bond. This means that our yield curve and the term structure of our debt is relatively short, truncating just over ten years out.

There is an alternative, and this opportunity should not be missed – long term infrastructure bonds**. For those with a memory that stretches back a little way, one could think of these as ‘war bonds’.

New Zealand currently lacks long term bonds. This may partly be because of the substantial involvement of local and central government in the commissioning and provision of long term, infrastructure investments. That is, the government crowds out a range of private investment activity. But in doing so, it also curbs the range of investment assets offered to the market.

The melt down in global financial markets has knocked New Zealand’s savers. Many have seen their financial wealth decimated as share and house prices fell, and others have seen it annihilated by the collapse of financial companies. This shock will not help New Zealanders tendency, as Minister English put it, ”to spend more than it earns and finance the difference by excessive borrowing”.

If the government is committed to encouraging New Zealander’s saving behaviour, supporting New Zealand’s infrastructure and to effectively managing its own debt, then it is obliged to consider long term bonds.

Professor Roger Bowden and Dr Dawn Lorimer, experts in economics and applied finance at Victoria University, advocate “going long in infrastructure investment”. Their ideas have recently been aired to Treasury and published in peer-reviewed international journals***. They note that New Zealand’s lack of bonds contrasts with a “revival of issuance in major international capital markets”. Their work provides a head start for the government in terms of thinking about the issues involved in developing a market for bonds.

infrastructure bonds would provide aging New Zealand households with a high-grade investment vehicle. Such an asset class would do more than provide finance for capital investments, which shorter term bonds could do. First, it could help develop a part of the capital market that the government’s role in the economy as a major infrastructure investor may currently prevent. Second, it may provide risk-averse investors with a safer alternative than options provided by private finance companies. Third, by encouraging saving behaviour, it may have a “social role” in “assisting people to plan their own financial future” (Bowden and Lorimer 2008).

The government has decided that, on balance, it is a good decision to take on debt that will push its net debt out to 35 percent of GDP by 2016. While it will pare this debt back over the decades, it will be around for many years, as will the assets it invests in. This is a chance for the Government to take a bold step. Long term infrastructure bonds will lengthen our yield curve and develop the sophistication of our capital markets. They can channel debt raising efforts towards productive infrastructure investment, safeguard New Zealanders’ efforts to save, and help New Zealand change lanes from recovery to prosperity. They could even be marketed as National Development Bonds, encouraging New Zealanders to have a share in re-building the nation.

*Bowden, R and Lorimer D (2008). The NZ term structure: going long in infrastructure. The FINSIA Journal of Applied Finance. 3: 24-29. \

**The NZDMO introduced an infrastructure bond in 2006 specifically to fund infrastructure projects. But their term structure is similar to other medium-term government bonds available.

***Bowden, R (2008). Lifecycle derivatives and retirement income assurance using debt. Journal of Pension Economics and Finance. 7(2): 1-30.