Merchant banks buy most Government stock

Press, 24 June 1985, Page 32

Merchant banks buy most Government stock

PA Wellington Merchant banks bought big in Friday’s Government stock tender, and are now in a position to possibly doominate the secondary market, particularly in the five-year stock.

In a tender that was otherwise described by one dealer as a “yawner” in terms of rates, because the market had anticipated the fall in interest rates, the volume acquired by the merchants and the lack of volume to other institutions became a talking point. Of the $149.4 million of 1991 stock available, $123.7 million was destined to the merchants. Market sources said that the stock is probably concentrated in the hands of a small number of merchants who accumulated it in a succession of, say, $lO million or $2O million bids. Chances of one merchant putting in an unprecedented $lOO million or more bid was suggested, but generally discounted around the market.

“We (dealers in general) might be brave, but we’re not that brave,” one dealer said.

Why merchants took so much five-year stock met a variety of explanations around the market, but it seems most probable it was to take advantage of a most promising arbitrage situation developing after another Eurokiwi bond issue made earlier in the week. The bonds, which are five-year negotiable paper akin to the 90-day commercial bill, were at rates of 17.3 to 17.4 per cent for five years. If the merchant bank locks into those sorts of rates, and can then take advantage of stock rates for the same term up to the 18.18 per cent highest accepted bid 3/91 stock, the margin is all profit. However, what this does is remove a large volume of stock from the market, stock which other institutions may sorely need to meet commitments entered into before the results of the

tender were known.

Other possible reasons for the dominance of merchants in the bidding put forward included the continued interest of overseas investors in the rates being offered, and the correlation that it is largely the merchant banks, with some brokers, that maintain the most contact with those investors.

It is also possible that the philosophy of the market is changing such that the institutions with solely New Zealand funding are finding the lowering rate less attractive.

It is more sensible for them to chase the higher rates of shorter-dated instruments, leaving the Government stock market for the more “internationalised” operators such as merchant banks.

For example, one dealer said, the trading banks are “craving liquidity” and that is all they want stock for. However, in this tender there was nothing shorter available than two-year 3/ 87 stock.

As it was, trading banks and savings banks took no part in the tender at any term, but equally building societies received nothing from the tender, probably not from choice, and superannuation funds and life insurance offices fared relatively poorly. The danger is that some of those institutions may have sold stock short before the tender which they did not have on the expectation of receiving it after the tender. Volumes before tender were reported as exceptional, and iif the afternoon after the results were announced the secondary market was active but was all buyers and few sellers. Rates came off even further under that pressure, with the 3/91 stock closing at 17.8 per cent. It remains to be seen whether those who missed stock will act in the secondary market or whether they will wait on the sideline to see what happens.