Southern Europe’s Debt Nightmare Denmark’s Dream as Rates Fall
Danish government bond auctions this year resulted in the lowest borrowing rates on record as Europe’s crisis spawns a two-tier bond market that’s prompting the debt office in Copenhagen to test longer maturities.
“With the present level of rates, we have tended to issue more in the longer end as it reduces our refinancing risk and our interest rate sensitivity,” Ove Sten Jensen, head of the government debt management department at the Danish central bank, said by phone. “We have been very dependent on the development in the euro area debt crisis.”
Denmark’s AAA credit rating and a government debt load that’s less than half the euro zone’s average have attracted investors seeking refuge from markets tainted by the crisis. The yield on Denmark’s 1.5 percent bond due 2023 fell to 1.3 percent in a Dec. 11 auction, the lowest since the debt department began selling the bond this year.
Denmark’s 10-year bonds yield about 28 basis points less than similar-maturity German bunds, while investors pay the Nordic country to hold its two-year debt. The debt office sold 4.5 percent bonds maturing in 2039 at a yield of 2 percent this week, versus 2.13 percent in October, it said Dec. 11.
“There has been a flight to quality, at certain times, a very big flight to quality,” Jensen said. “The average rates from the auctions are historically low.”
The debt office expects to release its funding strategy for 2013 today, when the government of Prime Minister Helle Thorning-Schmidt is due to publish its latest economic estimates.
Economy Minister Margrethe Vestager said this week the government will proceed with budget cuts even as the central bank predicts the economy will contract, to avoid breaching European Union budget restrictions.
The debt office probably will announce plans to sell bonds for 50 billion kroner ($8.8 billion) to 75 billion kroner in 2013, less than this year’s issuance of just over 100 billion kroner, after taking advantage of low rates to prefund the government’s financing needs, Jan Stoerup Nielsen, senior analyst at Nordea Bank AB, said in a phone interview.
The office may even cut that estimate next year as the government begins collecting additional tax revenue after lowering the rate on capital pensions that are cashed in during 2013, Nielsen said.
“The government has promised that this extra money will go only to bringing down the debt,” he said.
The market value of outstanding Danish central government securities has climbed 12 percent since hitting a 2012 low in March, as Europe’s efforts to resolve the debt crisis looked set to unravel. The value rose to 850.3 billion kroner in October from 755.9 billion kroner in March, according to central bank data.
“We’ve had very broad demand, and that’s been the case for most of the year,” Jensen said.
To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at email@example.com