Currency War in Denmark Gets Tailwind From Banks Buying Bonds

  • Auction for new bond attracted more bids than Nordea expected
  • Danish banks were probably biggest buyers to cover LCR needs

As Denmark’s central bank resumes government bond auctions, it appears the biggest buyers are the country’s banks.

That’s good for the Danes, because it leaves less AAA-rated Danish debt for foreign speculators to snap up, according to Nordea. The last time offshore investors swooped in on krone assets, it caused a crisis that forced the central bank to resort to extraordinary measures to defend its currency peg to the euro.

“All things being equal, the debt office will probably be pleased that domestic buyers are dominating the auction, so there isn’t renewed pressure on the krone,” Uffe Kalmar Hansen, a senior analyst at Nordea, said by phone. “The auction result definitely went the way the debt office had hoped.”

Denmark sold 5 billion kroner ($760 million) -- the maximum amount offered -- of its new 0.25 percent 2018 bond in an auction that attracted 11.8 billion kroner in bids on  Wednesday. That exceeded estimates by Nordea, Hansen said.

“We expect the buyers were primarily Danish banks seeking to cover their regulatory needs, but we don’t have final confirmation on that before we get the statistics at a later point,” he said. “It shows that there is a lot of interest in Danish bonds even after all that has happened this year.”

Here’s a recap of what happened in the beginning of 2015:

  • 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 debt office resumed government bond issuance Oct. 7 with an auction that attracted bids for more than three times the debt sold. Most of the demand was for a 2016 note, which is the kind of short-dated debt that banks prefer when managing their liquidity buffers, said Arne Lohmann Rasmussen, head of fixed income research, at Danske Bank in Copenhagen.

“Regulation is forcing banks to buy more of the safe assets like government bonds,” Rasmussen said by phone. “It’s very plausible that a lot of what has been sold in the auction went to banks” trying to fulfill their liquidity coverage ratios, he said.

The central bank doesn’t provide information on the buyers that turn up to its debt auctions. With a few months delay, it publishes statistics on foreign versus domestic aggregate ownership of Danish government bonds.

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