Denmark to Resume Bond Sales After Beating Back Speculators

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Denmark’s central bank said it will resume government bond auctions, which had been suspended since January, after pressure on its currency peg abated and the need for extraordinary policy measures was removed.

Auctions will start again in October, the central bank said in a statement on Wednesday. The bank, which houses Denmark’s debt office, said it targets 100 billion kroner ($15.3 billion) in bond sales through 2016.

The decision marks a “step toward normalization,” Anders Aalund, chief analyst at Nordea Markets in Copenhagen, said by phone. “They are aware that it is not going to be trivial or easy to get back into the market, therefore they need to start well ahead; liquidity has been becoming very, very bad.”

The bank has been buying kroner and selling foreign currency since reserves peaked at about 40 percent of gross domestic product in March. “As a consequence, there is no longer a need for the extraordinary measures that were launched following the capital inflow at the beginning of the year,” the bank said in a statement.

The fact that this week’s equity-market selloff didn’t feed through to bond markets probably encouraged the Danish central bank to move ahead with its plan to resume issuance, according to Jan Stoerup Nielsen, senior analyst at Nordea.

“Had we seen some serious volatility even in interest-rate markets, the Danish central bank may have held up the announcement,” he said. “Now, with no contagion spilling over into bonds they’re free to come back.”

The bank opted to halt bond auctions earlier this year after Switzerland’s decision to send its franc into a free float fanned speculation AAA-rated Denmark might be next. In response, the central bank in Copenhagen slashed its main rate, bringing it to minus 0.75 percent, and built up record foreign reserves. Its decision to cut off debt issuance was designed to close an avenue through which investors had hoarded krone assets.

The measures proved successful and the central bank won praise from the International Monetary Fund for managing to fight back hedge funds and other short-term investors intent on undermining its three-decades-old peg.

With bond issuance set to resume, the question is how soon the central bank will start raising rates. Danske Bank says an increase may come as early as Thursday.

“We still hold the view that the central bank wishes to see a further currency outflow to secure a level for the currency reserve close to the level that prevailed in 2014,” or about 450 billion kroner, according to Arne Lohmann Rasmussen, head of fixed-income research at Danske in Copenhagen. “If we see a rate hike in the near future, we expect it to be relatively small in size,” meaning not bigger than 15 basis points, he said in a note.

The central bank said it will also reduce the current-account limits after raising them in the spring, when it was trying to support banks struggling to adjust to negative rates. The overall current-account limit will be cut to 63 billion kroner from 174 billion kroner, the bank said.