Bond Liquidity Set to Shrink in Norway as Government Cuts Supply

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As investors in Norwegian bonds get ready for a 60 billion-krone ($8 billion) payday, the bigger picture is one of dwindling supply from the world’s safest issuer.

The development marks a complete reversal of a “supply glut” that has weighed on Norway’s bond market and that Gaute Marius Langeland and Joachim Bernhardsen, analysts at Nordea Bank AB, say now “seems to be behind us.”

The government on Friday will redeem a maturing note that paid 5 percent. Investors will probably try and pour the cash they get back into Norway’s 2017 note instead. A bond-market sell-off that started late last month probably won’t do much to dent demand, according to SEB AB.

“That bonds are selling off now ahead of the redemption makes this time different from the historical picture,” said SEB chief strategist Erica Blomgren. “Nonetheless, the redemption should still cause the yield curve to steepen, which would further be supported by the global sell-off in bonds.”

Investors in Norwegian debt face supply cuts as the government prepares to reduce issuance as early as the second half of the year. Norway’s revised budget, released this week, showed the government faces lower borrowing needs amid a decline in mortgage loans to public employees.

Bad Returns

Returns to date have been unimpressive. Norway’s bonds have lost 0.2 percent since the end of December, according to Bloomberg World Bond indexes. But the extra yield investors demand to hold Norwegian two-year debt instead of German bunds is about 108 basis points, compared with a five-year average of 126 basis points, the data show.

SEB estimates the government could reduce gross supply to as little as 37 billion kroner from a planned 48 billion kroner to 52 billion kroner. Nordea says the budget implies about a 23 billion-krone cut in the funding need for 2015.

Taking everything into account, Norway’s average annual debt issuance could be as little as 40 billion kroner, according to Blomgren.

“The impact will be lower gross issuance for 2016 rather than a halt to issuance this year,” she said. The “budget should come as a relief and support spread performance going forward. So far the impact has been limited, which is rather explained by focus in markets being elsewhere.”

Norway issued a gross 64 billion kroner in bonds last year, up from 20 billion kroner in 2011. Issuance rose after the government withdrew support for what was once a state-backed lender, Eksportfinans ASA, and started financing export guarantees directly from state coffers.

Nordea says Norway will wait until next year before cutting issuance to help it build a cash position at the central bank, which handles debt issuance.

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