Norway Misses Haven Fest as Record Issuance Looms: Nordic Credit
Norway faces higher borrowing costs next year as the AAA rated nation plans record bond issuance amid a potential drop off in demand from foreign buyers.
The Finance Ministry in Oslo last week presented plans to issue as much as 100 billion kroner ($17 billion) in long-term domestic loans next year, a record for the oil-rich nation and up from 70 billion kroner this year. Norway is seeking to finance increased lending to its exporters, the state’s housing bank and other government lending plans.
The supply increase will further test a market that has been underperforming its peers amid investor optimism European leaders will be successful in containing the euro crisis and keeping the common currency intact. Norway, Europe’s second- largest oil exporter, had emerged as a haven from the crisis because of its fiscal strength. The nation, like Switzerland, isn’t a member of the European Union.
“Issuance next year will be even heavier and we’re not seeing international investors stepping up to the plate,” Gaute Langeland, a senior fixed-income analyst at Nordea Markets in Oslo, said in an interview on Nov. 15. “You will need some domestic funds interested and we think that requires a significant change in pricing.”
Norwegian bonds have lost 0.24 percent since the end of July, the third-worst performances among 26 major sovereign debt markets tracked by Bloomberg/EFFAS indexes. Only U.K. and Danish debt posted steeper losses. Yields on three-year bonds rose to 1.42 percent today from a January low of 0.96 percent. The bonds have gone from yielding as much as 170 basis points below swap rates to about 73 basis points. Spreads have averaged 116 basis points this year.
Norwegian broad market returns lagged behind a 9.6 percent gain in Italian bonds and 7.6 percent increase in Spanish debt after European Central Bank Governor Mario Draghi in July pledged to do “whatever it takes” to save the euro. At the same, Norway’s central bank has signaled it may raise benchmark interest rates as soon as March, to cool an economy that Norges Bank Deputy Governor Jan F. Qvigstad says has been “overheating.”
Still, the government is sanguine that its unblemished credit history and still relatively limited supply of bonds will continue to attract investors.
“We aren’t very concerned about the demand,” Sigurd Klakeg, deputy director general at the Norwegian Finance Ministry, said in a Nov. 15 interview. “After all there’s a lot of money floating around and there is still demand for quality issues both in Norway and other countries. We’re a safe haven for people out there.”
Norway has used its oil wealth to build up a $660 billion sovereign-wealth fund and the nation has no net debt. The government uses up to 4 percent of the fund to cover budget deficits.
Norway is targeting a maximum outstanding amount in treasury bills next year of 250 billion kroner. The Finance Ministry and the central bank, which issues debt on behalf the government, will publish a 2013 auction calendar in December.
“Even if the foreign share of investments in Norwegian has fallen slightly this year, international investors are still active,” said Hans Christian Tronstad, chief specialist at Finance Ministry’s Debt Management Office. “Our impression is that these investors welcome improved liquidity in the bonds following larger government borrowing.”
Norway is the world’s safest issuer of bonds, credit default swaps indicate, as oil wealth generated from its offshore deposits over the past 40 years has allowed the economy to withstand the worst of Europe’s debt crisis. The country’s five-year CDS traded at about 19 basis points, while Germany’s stood at 31 basis points. Credit default swaps allow traders to bet on the probability of a debt default.
Norway has about $74.5 billion in outstanding bonds and bills, the third-lowest amount of the 24 developed nations tracked by Bloomberg.
Traders are welcoming more debt, saying it will help improve liquidity, or ease of trading, which could improve pricing as whole and damp risks of sudden price swings.
The yield difference between Norway’s benchmark note due 2021 and German bonds with a similar maturity has widened to 63 basis points today from seven basis points in January. Swedish 10-year bonds trade at a spread of nine basis points more than German debt while Danish bonds trade 27 basis points below the rates of Europe’s largest economy.
“Some of the explanation for this isn’t a matter of supply, but it’s basically a matter of liquidity. So it’s some sort of liquidity premium,” Michael Kofoed, a bond trader at SEB AB (SEBA) in Oslo said by phone. “So if we have better liquidity we will see spreads go tighter in the longer run.”
Langeland at Nordea also said the market may benefit from improved liquidity.
That may still depend on what the central bank decides to do. Policy makers have signaled their next move will be to raise the main rate from 1.5 percent to counter the effects of overheating. The central bank has left their main rate unchanged since March after cutting it twice since December.
Last month Governor Oeystein Olsen postponed the bank’s next rate rise into 2013, citing low inflation even as record offshore investments helped push registered unemployment to lowest in almost four years.
“I think there will be some widening of the spreads because it is a new situation,” said Jens Peter Soerensen, chief bond analyst at Danske Bank A/S (DANSKE) in Copenhagen. “It always takes a little bit of time to adjust to that and there are bigger amounts that you need to trade.”
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