Denmark’s Central Bank Considers Steps to Aid Bond Liquidity

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Denmark’s central bank is considering deploying measures that will aid liquidity in the country’s government bond market after suspending issuance to defend the krone’s peg to the euro.

“We’re looking at possible measures to improve liquidity,” central bank spokesman Karsten Biltoft said in an e-mailed response to questions on Tuesday. “I will not rank the priority” for tackling the issue, he said.

Denmark halted government bond auctions on Jan. 30 as part of a series of steps designed to deter investors from pouring into AAA rated krone assets. Speculation the central bank may need to abandon its currency peg soared after Switzerland dropped its euro cap on Jan. 15. The International Monetary Fund has since declared Denmark triumphant in its battle against speculators, and said the central bank’s handling of the matter added to its credibility.

The central bank’s acknowledgment that Denmark’s bond market may need some liquidity support follows criticism from some of the country’s biggest institutional investors. PFA A/S, Denmark’s largest commercial pension fund, has said the suspension of bond sales is killing liquidity and creating an “unsustainable situation.”

Huge Portfolio

PFA’s head of fixed-income investing, Poul Kobberup, in an interview this month urged the central bank to be “more active in the market. They have a huge portfolio” and “even if they’re not issuing, they could still go in and buy or sell papers, or change duration.”

Switching one bond for another is an option the central bank already has experience with and that would improve liquidity without opening the flood gates to foreign investors, according to Anders Aalund, chief analyst for Nordea Bank AB, in Copenhagen.

Agreeing on switch-auction pricing “will be a challenge but it could be one step,” Aalund said. “I don’t see what else they can do. If they restart issuing, to make the market function again, there will be a risk of net buying of kroner even if the issuing is sterilized with buybacks.”

The central bank generally has sought to have a liquid market. The bank had planned to issue bonds for 75 billion kroner this year even as government deposits are “higher than necessary,” according to its December strategy report.

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