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New Zealand bonds are likely to become more attractive as the global economic recovery gives investors more confidence to take on greater risk and chase higher yields, Finance Minister Bill English said.

The government’s plan to sell NZ$45 billion ($31 billion) of bonds during the next four years will also appeal to foreign investors by increasing liquidity, English said in an interview from New York, where he has been meeting investors. The sales will more than double outstanding debt.

“New Zealand is in a position where it’s got a strong credit rating and traditionally had quite good returns on bonds, so with more bonds available, there’s good interest,” he said.

Investors are already benefiting from gains in the New Zealand market, where the return on maturities of less then three years are the second-best since Dec. 31 among bonds tracked by Bloomberg. The country’s 10-year bond yields are the highest in the Group of 10 nations. As New Zealand’s economy emerges from its worst recession in three decades, the demand for higher yields is likely to increase.

“If the recovery really picks up steam, people’s risk appetite will be raised and they’ll be looking for higher-return investments,” said Imre Speizer, a market strategist at Westpac Banking Corp. in Wellington.

New Zealand bonds of less than three years have returned 19.9 percent in U.S. dollar terms this year, lagging behind a 24.9 percent gain by South African debt of similar maturity, according to indexes compiled by the Paris-based European Federation of Financial Analysts’ Societies.

Budget Deficit

Government 10-year notes in New Zealand yield 2.28 percentage points more than similar-dated U.S. Treasuries and 0.18 point more than Australian securities, according to data compiled by Bloomberg.

The government is selling more bonds to fund a widening budget deficit. Increased sales may be attractive to investors who transact in larger amounts and can buy or sell without affecting the price. English is visiting investors in Japan and the U.S. this week to encourage investors to buy New Zealand bonds as confidence returns to global markets.

“There are other high-yielding currencies around now and the market will be a bit more competitive from their point of view,” he said. “Australia has a reasonably good story. The same investors who are looking at us are also looking at Australia.”

Emerging From Recession

New Zealand’s economy began contracting in the first quarter of last year and is emerging from its worst recession in three decades. The central bank has kept interest rates at a record-low 2.5 percent since April and Governor Alan Bollard has said he won’t raise borrowing costs until late 2010.

Neighboring Australia has avoided a recession and this week said its economy expanded 0.6 percent in the second quarter, fanning expectations the nation’s benchmark interest rate may rise from 3 percent as early as October. That compares with rates of 0.1 percent in Japan and as low as zero in the U.S.

“My impression is that over the next 12 months or so, if the interest rate differential grows between New Zealand and Australia, there will be a bit more investor interest flow to Australia,” said English business cards design. “I don’t think we will have any trouble getting our share.”

Rate Differential

Like New Zealand, Australia is selling a record amount of debt to fund its deficit, announcing in May its intention to offer A$60 billion ($50 billion) of bonds in the year to June 30.

Australia’s rate advantage over New Zealand may narrow as the smaller nation’s economy recovers faster than the Reserve Bank of New Zealand has forecast, RBC Capital Markets said today. The unit of Canada’s biggest lender scrapped a forecast for Australia’s dollar to rise to NZ$1.30 in the coming year.

“This week’s NBNZ Business Survey suggests New Zealand GDP growth will return to trend one quarter faster than the RBNZ had forecast in June,” Sue Trinh, a senior currency strategist in Sydney at RBC, wrote today in a note to clients.

Investors such as Daiwa Securities Group Inc. in Tokyo, who have been heavy investors in New Zealand bonds in the past, are more confident about the global recovery, English said. The Japanese investors, in particular, want to know about the likely track of the nation’s currency and interest rates, he said.

“In Japan, they are just interested in the yield,” he said. “We just talk them through our micro economic policy. They have a clear understanding we don’t target the exchange rate and the Reserve Bank runs interest-rate policy.”

Carry Trades

New Zealand’s currency has surged 34 percent the past six months amid expectations the economy will recover and interest rates will rise. Investors are attracted to the currency by the potential for carry trades, where they borrow in low-cost currencies such as the greenback and the yen to buy bonds and shorter-maturity paper in countries with higher returns.

Buying the kiwi with borrowed dollars returned 36 percent since March, the second-most profitable trade among the 16 major currencies after the South African rand, Bloomberg data shows.

New Zealand is confident the government’s books are in good shape and the sovereign credit rating will be protected at AA-, said English, who also visited Standard & Poor’s Corp. and Moody’s Investors Service.

“Our growth is stimulus driven and it doesn’t automatically mean we are on an upward path,” he said. “For a lot of people, the economy hasn’t really got going until unemployment stops rising, and that still looks to be the middle of next year.”

The jobless rate rose to a nine-year high of 6 percent in the second quarter and may reach 8 percent by mid-2010, the government forecasts.

“People will feel more confident about growth when they see there’s enough of it to take the top off unemployment,” English said.

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