The Ministry of Finance has launched a 15-year inflation-linked Treasury bond, marking a departure from Government’s existing domestic debt instruments.
The Minister of Finance Neal Rijkenberg announced on Monday in Finance in Focus.
Rijkenberg said the new bond represents a departure from Government’s existing domestic debt instruments. Treasury Bills currently run from 3 months to 1 year. Treasury Bonds are issued at 3, 5, 7 and 9 years, all at fixed rates.
The 15-year bond will not carry a fixed rate. It will be based on a floating rate linked to inflation, with an additional fixed top-up.
According to Rijkenberg, the decision to move to longer tenors and inflation-linking is aimed at reducing the risk premium built into fixed-rate long-term borrowing.
“When you fix the rate, the longer the period, the more expensive it is because people build in risk, because they don not know what is the interest rates, what is inflation going to do in nine years time,” he said.
By linking returns to inflation, Government expects to remove that uncertainty for investors and lower the cost of borrowing over the long term.
The Minister said the instruments are targeted at long-term investors such as pension funds. He noted that funds managing money for contributors with 30 to 40 years until retirement require assets that match their liabilities.
“People like pension funds where a 25 year old working today is still going to work for 40 years before the money must go out of the fund. They like longer instruments often, because that money will be with them for a long time,” Rijkenberg said.
He added that an inflation-linked return ensures contributors’ savings grow above inflation. “They are not only getting inflation, they are getting something more than inflation,” Rijkenberg said.
Government is testing market appetite for the 15-year bond and indicated it may consider 20-year bonds in future, depending on demand.
The Ministry said fixed-rate bonds force Government to pay higher interest to compensate investors for inflation risk over long horizons. The floating, inflation-linked structure is intended to align borrower and investor interests. 
