The next time Denmark sells bonds, it will be to cover its borrowing need for 2014 as the debt office hoards liquidity that Europe’s north-south crisis divide has left cheaper than ever.
The 102 billion kroner ($18 billion) Denmark sold in 2012 already covered the nation’s entire 2013 financing need, the debt office in Copenhagen said last week. The 75 billion kroner in bonds it intends to sell next year will put Denmark more than a year ahead of its funding plan. And as borrowing costs sink below zero at the shortest end of its yield curve, Denmark is also extending maturities to lock into historically low rates that investors are bestowing on nations untainted by the crisis.
“By implementing that strategy for some years now, we are in a situation where we have plenty of liquidity,” Ove Sten Jensen, head of the government’s debt management department at the central bank, said in an interview. “We have liquidity available for more than one year’s funding need.”
Investors have designated AAA rated Denmark a haven from the turmoil that’s plaguing southern Europe, and remained loyal to the nation’s debt markets even as its economy contracts. Denmark, which boasts a debt load that’s half the euro area’s average, pays about 26 basis points less than Germany to borrow over 10 years. The country offers negative yields on its two- year debt as investors forego returns in the hope of protecting their principal.
Denmark’s challenge now is generating enough liquidity in its bond supply to keep investors happy. The debt office plans to do this by cutting back its Treasury bill program, and funneling more of its issuance into bonds as long as 30 years.
The debt office cut this year’s Treasury bill program by 33 percent to 30 billion kroner “so that we can better support liquidity in the other papers,” Jensen said. “It is important for the investors that the papers are liquid over the entire maturity spectrum.”
In an auction last week, the yield on Denmark’s new 10-year benchmark bond declined to 1.3 percent, down from 1.33 percent a month earlier. The bid-to-maturity yield rose in Copenhagen trading to 1.422 percent from 1.4 percent, at 11:22 a.m.
The debt office sold 4.5 percent bonds maturing in 2039 at a yield of 2 percent at the same auction, versus 2.13 percent in October, it said Dec. 11. The yield on 30-year U.S. government debt was 2.9 percent at the end of last week.
Investor appetite for krone-denominated assets has spread to Denmark’s mortgage market, the world’s third largest for bonds covered by home loans.
Yields on 434 billion kroner in Danish mortgage bonds sold in November and December auctions to finance adjustable-rate loans eased to record lows, the Association of Danish Mortgage Banks said today. The average yield was 0.42 percent with investors placing bids for three times the amount sold, the Copenhagen group said.
Denmark’s dwindling economic prospects have done little to dent its appeal among bondholders. The government of Prime Minister Helle Thorning-Schmidt said Dec. 13 gross domestic product will shrink 0.4 percent this year, matching the pace of contraction in the 17-member euro zone. The Nordic nation has struggled to emerge from dual housing and regional banking crises that have undermined confidence among its consumers.
Denmark has a 2013 domestic financing need of 139 billion kroner, compared with 188 billion kroner for 2012, the Finance Ministry said last week. In addition to its debt issuance plans, the government plans to draw down its account with the central bank by 34 billion kroner.
Denmark’s issuance need could shrink even further if revenue from a capital pension tax overhaul next year exceeds a minimum estimate.
Though the government’s latest forecast puts the proceeds at 5 billion kroner, the amount could be as high as 150 billion kroner, according to Jan Stoerup Nielsen, a senior analyst at Nordea Bank AB. About 450 billion kroner are held in the pensions, he said.
“If they get huge revenues, they don’t have to issue bonds for a very, very long time,” Nielsen said.
According to Jensen at the debt office, “it’s uncertain how much will be coming in so we’ve put forth a strategy for 2013 which we feel sits whatever happens. It’s important to avoid a stop-and-go issuance.”
To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at email@example.com