Kiwi bonds may offer better returns than US Treasurys

Bond investors, look here for higher yields

Investors yearning higher yields while keeping a lid on risks have had a hard time of late. One investor says New Zealand debt may come to the rescue.

U.S. Treasurys have long been a safe haven asset, but a sharp plunge in yields has pushed investors to search elsewhere. Recent Treasury International Capital (TIC) data revealed foreign investors dumped nearly $33 billion dollars in U.S. paper for the third straight month in June, begging the question of where market players are setting their sights on next.

One of those markets could be New Zealand, according to Jeremy Sullivan, investment advisor at Hamilton Hindin Greene, a Christchurch-based firm that has $360 million in assets under management.

The country's 10-year government bond yield is around 2.15 percent and while that may not seem like much, it is still higher compared with the U.S. 10-year note's near-1.5 percent level. Sullivan says it's one of the best yields in the developed world.

"That interest rate differential compared with the rest of the world and their respective easing biases is still attractive," Sullivan told CNBC's Squawk Box.

New Zealand's creditworthiness is also robust. The country's sovereign debt is rated double-A by Standard & Poor's and Fitch Ratings, just a notch below the highest debt rating possible.

In the secondary market, government and corporate bonds are trading above par value and as the Reserve Bank of New Zealand (RBNZ) embraces a prolonged easing bias, those premiums will only increase, he added.

The central bank delivered a 25 basis point interest rate cut to 2 percent on Thursday and indicated it would be easing further to lower the strong and push consumer price inflation (CPI) to its 1-3 percent target range.

But despite the RBNZ's intentions, the local currency hit a more than one-year high as some traders had expected more aggressive stimulus. Economists now widely anticipate another rate cut in September or November.

That's good news for fixed-income investors as bond prices rally when interest rates are cut.

"Most New Zealand companies are beating expectations so lower interest rates will increase their profitability," Sullivan said.

Among corporate investment-grade bonds, Sullivan suggested Australia's 'Big Four' banks: Westpac, National Australia Bank, Commonwealth Bank of Australia and Australia and New Zealand Banking Group.

"These banks are raising a lot of tier 1 and tier 2 capital but what investors need to be cautious of are shocks associated with those investments. The worst case scenario is they can be converted to equity," he noted.

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