Dollar Investors Coveted in Denmark as Swaps Expand Funding BaseFrances Schwartzkopff
Denmark plans to make more regular use of currency swaps to expand its funding base and target dollar investors in a strategy the debt office bets will save it money.
Denmark, which pegs the krone to the euro, is now taking a more “neutral” position on its foreign borrowing after previously relying on Europe’s single currency, said Ove Sten Jensen, head of the government’s debt management office at the central bank in Copenhagen.
“We mainly borrow in foreign currency to cultivate our investor base at the present,” Jensen said in an interview. “Hence, we also consider dollar issuance, because there may be some different investors in dollars who complement our existing investor base.”
The debt office is targeting a broader currency base after the global financial crisis showed that reliance on a single market can prove costly, even for AAA rated issuers like Denmark. The Scandinavian country isn’t alone in targeting the dollar market, the world’s most liquid, as borrowing costs drop from January’s 19-month high.
Ireland’s debt agency has said it’s considering a sale in dollars, and Spain last month sold $2 billion in dollar-denominated securities in its first foray into the market since September 2009. Spain shaved 10 basis points off the rate it pays by avoiding the euro market, HSBC Holdings Plc estimated.
Denmark is planning as much as 2 billion euros ($2.6 billion) in foreign borrowing this year, either in euros or dollars. That’s a 33 percent increase on its maximum target for 2012.
“The strategy is more neutral regarding currency than previously,” Jensen said. “Often you get the best results, cost-wise, by issuing in dollars if you’re not doing a lot of issuance.”
The debt office estimates that it cut the interest rate on last year’s foreign borrowing by almost two-thirds by taking out a bullet loan in dollars and then swapping it into euros. Asian investors were the biggest buyers, representing 39 percent of the total.
The office took out loans for $1.75 billion in 2012, with an effective interest rate of 0.65 percent, after getting bids for $3 billion, the central bank said last month. That was 29 basis points over the U.S.’s three-year government bond.
The office then swapped the loan into euros with a fixed rate of 0.21 percent. That’s less than it would have paid if it had gone straight to the euro market, it said last month.
“We watch the swap market,” Jensen said. “It’s part of getting an attractive result.”
Currency market developments have helped push Denmark’s short-term borrowing costs below zero. A capital influx last year, as investors fled the euro zone, strengthened the krone and forced the central bank to resort to a negative deposit rate.
“There still appears to be considerable foreign interest in our Treasury bills,” Jensen said. “Although we don’t have any new statistics yet, the trend appears so far to be broadly the same as last year.”
The yield on Denmark’s two-year government bond fell today amid concerns the stalemate after Italy’s elections last month will reignite Europe’s sovereign debt crisis. The yield on the bond maturing Nov. 2016 fell one basis point to 0.258 percent.
The krone gained against the euro to 7.4547, its strongest level in more than five months. The central bank targets a rate of 7.46038 per euro, inside a band of 2.25 percent.
The debt office has sold bills at yields that were negative, or at zero, in all auctions since April. In a Feb. 27 auction, the yield on the bill due Sept. 2 was minus 0.07 percent and the yield on the June 3 note was minus 0.125 percent.
This year’s syndicated foreign borrowing will have a maturity of two to five years, and dollar borrowing would be swapped so the final exposure is in euros, according to the central bank.
“For many years, we have only had end-exposures in foreign debt in euros,” Jensen said. “We are not there to have an opinion about the exchange rate between, for example, dollars and euros. The Danish krone is pegged to the euro, so our neutral position is to have our foreign debt in euro. That’s what we’ve done since 2001.”
To reach more investors, the government’s debt office last year issued its first inflation-linked bond and this year will seek to retain interest by building liquidity in its 10- and 30-year series.
“We try to keep the investor base alive by coming out each year,” Jensen said. “At times during the crisis -- 2008 and 2009 -- the market was really difficult for nearly all names.”
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