Bloomberg News

Norway Bond Yields Test German Spread Parity on Euro Flight

January 12, 2012

(Updates spread and yields in second paragraph.)

Jan. 11 (Bloomberg) -- Norwegian 10-year bond yields, which have eased to a two-decade low, are approaching parity with Germany as investors dump debt-plagued euro assets and flock to the world’s biggest AAA rated budget surplus.

The yield on Norway’s benchmark 10-year note today fell 2 basis points, or 0.02 percentage point, to 1.95 percent, the lowest since at least 1992, as of 8:55 a.m. in Oslo. The difference in yield between Norway’s note and German debt narrowed one basis point to about 11 basis points. The spread was at more than 50 basis points at the start of the year.

“Demand for Nordic government bonds, especially Norwegian, looks like it’s going to continue picking up,” Henrik Asmussen, head of the frequent issuer desk at Nykredit Markets in Copenhagen, said in an interview. “As long as the eurozone remains a mess, this story isn’t going to change.”

The world’s seventh-largest oil exporter, which boasts a $560 billion sovereign-wealth fund and no net debt, is the world’s safest issuer of bonds, credit default swaps indicate. Norway’s oil wealth has shielded it from the worst of Europe’s debt crisis, which now threatens to deprive France and even Germany of their AAA credit grades. As investors adjust, countries like Norway can expect their bond markets to prosper, Asmussen said.

“The Norwegian bond market might be the safest asset there is,” Lars-Erik Aas, head of research at Nordea Bank AB in Oslo, said by phone. “It is backed by one of the richest governments in the world, which owns the petroleum fund.”

Best Performer

Norwegian government bonds with maturities of seven to 10 years are the world’s best performers this year, according to Bloomberg data. The country’s broad market bond index has returned 1.5 percent this year, when including reinvested interest, while Swedish debt with a maturity of more than one year has given investors a loss of 0.3 percent, Bloomberg indexes show. Euro bloc debt has lost 1 percent this year, the indexes show.

“It’s continued flight to quality, i.e. global reserve managers diversifying into countries with strong credit profiles,” Erica Blomgren, chief strategist for Norway at SEB AB in Oslo, said in an e-mailed reply to questions yesterday.

The bond purchases have also buoyed Norway’s currency. The krone has gained 1.1 percent against the euro this year to a four-month high of about 7.657.

Devising Rulebook

In the euro area, leaders are trying to devise a new rulebook for a closer fiscal union as the debt crisis spreads to Italy, the bloc’s third-largest economy. Fitch Ratings said yesterday Italy faces a “significant chance” of a downgrade after last month lowering the outlook on France’s AAA rating and putting countries including Spain on review for a downgrade, citing a failure to find a “comprehensive solution” to the crisis.

Norway’s mainland economy, which excludes the oil and shipping output, may expand 2.7 percent this year, the Organization for Economic Cooperation and Development forecast in November. That compares with estimated growth of 0.2 percent in the 17-nation euro area, the OECD forecast. Norway, the only Scandinavian country outside the EU, boasted a 10.5 percent budget surplus of gross domestic product in 2010, the biggest of all AAA rated sovereigns.

Rate Cuts

Norway’s central bank cut its benchmark interest rate by 50 basis points last month to 1.75 percent to protect the economy from the fallout of Europe’s debt crisis as export demand wanes. Governor Oeystein Olsen said last week that policy makers have “room to maneuver in both directions” on rates. DNB ASA, the country’s biggest lender, predicts the central bank will cut rates a further 25 basis points at its next meeting in March.

In neighboring Sweden, which boasted the European Union’s fastest economic expansion in 2010 and a budget surplus last year, the government already pays less to borrow than Germany. The yield on 10-year notes issued by AAA rated Sweden, the largest Nordic economy with a 540 billion-krona ($78 billion) bond market, was 1.67 percent today, about 20 basis points less than similar-maturity bunds.

Demand for Norwegian bonds is picking up as the country raises debt sales this year to finance a new 40-billion kroner export lending program. The central bank is increasing the number of auctions to 17 this year from six in 2011 after the government decided to expand its 204 billion-krone bond market following a decision to wind down state-backed Eksportfinans ASA.

Increased Liquidity

“That might increase the liquidity in the market and might make the market more interesting,” Aas said.

Norway’s average daily trading in government bonds, excluding repo transactions, is 1.2 billion kroner. That compares with about 17.3 billion kronor in neighboring Sweden, according to data provided by Nasdaq OMX and Bloomberg calculations.

Norway’s central bank on Jan. 9 received bids for almost three times the amount it offered in notes maturing next year. The country sold 6 billion kroner of 6.5 percent 2013 notes at a yield of 1.39 percent. It received 17 billion kroner in bids, for a cover ratio of 2.85, the highest since March.

--Editors: Jonas Bergman, Tasneem Brogger

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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