$90 Billion Fund Pledges Support as Denmark Resumes Debt Sales

  • Denmark to resume bond auctions after eight-month hiatus
  • PFA Pension says it plans to participate in Oct. 7 auction

As Denmark returns to the debt markets it abandoned in January, the country’s biggest commercial pension fund is promising to be there to help pick up the pieces.

PFA Pension, which oversees about $90 billion in assets, says it’s intending to brave the uncertainty that will accompany the Danish government’s first bond sale in more than eight months.

The fund, which held about $14 billion in the debt at the beginning of the year, “will remain a faithful investor,” Chief Investment Officer Christian Lage said in a phone interview.

Bond issuance has been suspended since January
Bond issuance has been suspended since January

Here’s a brief recap of what happened in January:

  • Switzerland’s decision to send the franc into a free float triggered speculation Denmark would do the same and abandon its euro peg
  • The Danish central bank responded over the following weeks by cutting its deposit rate to minus 0.75 percent and building up record foreign currency reserves
  • The Danes then applied their own version of quantitative easing, suspending bond issuance to cut supply and drive down long yields, all in an effort to keep speculators out

The result was a plunge in Danish government bond volumes that arrived just as global investors started to panic about liquidity.

Adding to pressure on the debt office is Denmark’s announcement last month that it will need to borrow about 6 percent more from markets than it had previously estimated. It’s against that backdrop that institutional investors need to show support, PFA said.

“We think it’s extremely important that the insurance and pension industry take on responsibility to help rebuild liquidity,” Lage said.

But eight months is a long time and the risk is that a number of investors will simply have turned elsewhere to plug the gap once filled by Denmark’s bonds. Even Lage acknowledges that investors will “reconsider” whether the debt “can be used as part of your fund’s liquid reserves.”

“Liquidity is obviously important” Lage said. But staying away would only exacerbate the risks, he said.

“If the government bond market is illiquid, it spills over to the derivative market and then that illiquidity can move over to the mortgage bond market,” he said. “So there’s a risk of contagion which we all have a mutual interest in preventing.”

In Wednesday’s auction, the debt office will offer its 10-year benchmark, the 1.75 percent note due 2025, as well as its 2.5 percent bond due 2016.

The office doesn’t reveal targets for individual auctions, but has said it will issue 100 billion kroner ($15 billion) in bonds through 2016. Nordea says that isn’t enough to provide the buffer Denmark’s government has traditionally operated with, and predicts the debt office will need to raise its issuance goal for next year by about 25 billion kroner.

Lars Mayland Nielsen, head of the debt office, declined to comment on the sales target. When asked how investors’ liquidity concerns will be handled, he said “the debt office has been in an ongoing dialogue with the market,” in an e-mail.

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