Denmark Set to Raise Bond Target as Demand Soars, Liquidity Lags

  • Debt office due to publish 2016 strategy update this month
  • Recent auctions have attracted more interest than expected

Denmark will probably raise its debt issuance target for next year to restore volume and satisfy demand.

After suspending issuance for much of this year to keep speculators out and defend its currency peg, Denmark will probably try to sell as much as 100 billion kroner ($15 billion) in bonds next year, or about one-third more than implied in a previous forecast, according to Nordea and Sydbank.

Selling more bonds will help the office normalize liquidity and also replenish the government’s account at the central bank, which had fallen while auctions were suspended, Henrik Hansen, senior fixed income analyst at Sydbank, said by phone.

Since the office resumed auctions two months ago, it has seen a “strong comeback,” he said. “So far the debt office has been able to sell relatively many bonds without strengthening the krone.”

Here’s a reminder of what happened in Denmark’s bond and currency markets earlier this year:

  • The Swiss National Bank’s Jan. 15 decision to abandon its ties with the euro triggered a speculative attack against Denmark’s euro peg
  • Denmark suspended bond auctions in February to push down longer-dated yields and keep speculators out by choking supply
  • Without auctions, liquidity in the Danish bond market dried up, fueling concerns the debt office would face difficulties when restarting sales
  • As pressure on the krone eased, the country resumed auctions in October, targeting 100 billion kroner of sales in the 15 months through 2016
  • The office has already sold about 23 billion kroner in bonds over 5 auctions with a bid-to-cover ratio of 2.7; it sold about 1 billion kroner more at each auction than it had signaled it would
  • The office has one more auction scheduled this year, on Dec. 16

Denmark has “seen very nice demand and they also want to strengthen liquidity, and that points toward a higher issuance target,” Jan Stoerup Nielsen, senior analyst at Nordea, said by phone. “So we think that the debt strategy will include a revision.”

The office hasn’t said when it will publish its strategy for 2016. The issuance target is usually announced around the middle of December.

Per Callesen, deputy governor at the central bank, on Thursday cautioned investors against expecting “large quantities” of government bonds next year.

“The rest of the world is carrying out quantitative easing by buying up bonds to push rates lower,” he said at a Copenhagen press briefing. “If we, in this country, were to do the opposite, it would be ‘quantitative tightening,’ which would have potential monetary ramifications.”

Despite those comments, “we still think it’s likely that bond sales will be higher,” Nordea’s Nielsen said. “The government still has a relatively high financing need for 2016.”

Michael Liebak, chief analyst at Nykredit Bank, says any raised issuance target will probably come later in 2016. He says the office may need to add as much as 30 billion kroner to its latest goal, reflecting “optimistic” economic growth forecasts and the rising cost of absorbing more refugees. The office might announce the revision “in the spring or in the summer,” he said.

To be sure, Denmark’s biggest bank predicts the central bank will stick close to its latest forecast. Danske Bank sees issuance of 75 billion kroner in 2016.

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