Europe’s Worst Bonds See Relief as Norway Reserves Tapped

Norwegian government debt, the worst performers in Europe this year, is set for a reprieve as Scandinavia’s richest nation prepares to cut issuance by as much as 50 percent during the next three months.

Norway’s bonds returned 3.7 percent since the end of December, the least among 19 nations tracked by Bloomberg World Bond indexes and about half the gain for euro-area bonds. The extra yield investors demand to hold 10-year krone-denominated debt instead of German bunds was about 50 basis points wider than the five-year average, the data show.

“We have for a long time highlighted that supply will ease during the second half of the year and argued that it will support tighter Norwegian government-bond spreads against Germany,” Erica Blomgren, chief strategist at SEB AB in Oslo, said by message. “The heavy and front-loaded long-end supply is probably the main reason for the current wide spreads.”

Norway’s bonds have been weighed down by a jump in supply as demand for AAA rated assets cooled. The central bank also said June 19 that it may need to cut its benchmark interest rate later this year to counter slumping oil investments, after previously flagging its next move would be higher

Spread Tightening

The government on June 27 announced it would cut bond sales to 10 billion kroner to 14 billion kroner in the third quarter, down from 21 billion kroner in the three months through June and 23 billion kroner in the first three months of 2013.

Blomgren said waning supply could allow yield spreads to Germany in 2023-2024 bonds to narrow by 30 basis points.

The spread between Norway’s 10-year note and similar maturity benchmark German debt has widened 20 basis points this year to about 124 basis points, compared with an average of 75 basis points over the past five years.

Norway has plans to issue a gross 70 billion kroner in bonds this year, up from 62 billion kroner in 2013, 60 billion kroner in 2012 and 20 billion kroner in 2011. Issuance has surged since the government withdrew support for export lender Eksportfinans ASA in 2011 and moved financing to the state. The government is also covering for mortgage lending through a state-run home-loan program as the housing market cools.

Tapping Cash

Western Europe’s largest oil exporter is now using surplus cash to cover additional spending plans. The new Conservative government in its revised budget in May flagged it would provide an additional 11.4 billion-krone increase in mortgages.

The Finance Ministry has a long-term goal of maintaining cash reserves of more than 50 billion kroner. Growth in those reserves allowed the government to only issue 62 billion in bonds 2013, below the 70 billion kroner it had targeted before the start of the year.

The drop in issuance is “positive for pricing in the market and supportive for the bonds,” said Gaute Marius Langeland, chief analyst at Nordea Bank AB. “The auctions themselves are probably not going to be as strong as we saw a few months back.”

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