Denmark to Sell First Linkers as Crisis Drives Funding Shift
February 23, 2012, 1:20 AM ESTBy Frances Schwartzkopff
(Updates with bond yield in 10th paragraph.)
Feb. 22 (Bloomberg) -- Denmark will sell its first inflation-linked government bonds next quarter as the country’s debt office seeks to broaden its funding base by offering securities it says investors are asking for.
The debt office, a department inside the central bank in Copenhagen, will sell “at least” 20 billion kroner ($3.6 billion) in 2023 notes indexed to Denmark’s consumer price index, Ove Sten Jensen, head of the government’s debt department, said in a phone interview yesterday. The bank intends to sell the full amount “over the coming few years,” he said.
“The crisis has taught us that it’s useful to have a broad spectrum of debt products on the shelf to ensure a broader investor base when the going gets tough,” Jensen said.
Issuance in inflation-linked government bonds has grown in the euro area over the past decade as investors look for ways to guard against consumer price gains that erode returns. The region’s three biggest economies -- Germany, France and Italy -- had a total of 337 billion euros ($446 billion) in the securities outstanding at the end of last year, a surge of more than a factor of 10 since 2002, the central bank estimates. Denmark isn’t a euro member, though it pegs the krone to Europe’s single currency.
Pension Funds
“We’re responding to investor demand in the market, from pension funds and institutional investors, who have expressed an interest in having such a product,” Jensen said.
The central bank estimates more Danish pension funds are providing guarantees that protect customers’ purchasing power. That’s prompting funds to seek investments that help them match returns on their assets and their liabilities.
According to Jens Peter Soerensen, chief bond analyst at Danske Bank A/S in Copenhagen, “the demand ought to be there” for krone index-linked bonds. “It’s a really good idea that we’re getting a proper linker market here,” he said.
The decision to issue inflation-linked bonds may also help Denmark’s nominal debt market, Soerensen said.
“A solid issuance of linkers means they’ll need to shift part of their issuance in the nominal 3 percent 2021 bond over to the 10-year linker and that ought to support the nominal bond versus, for example, Germany,” he said. “I like both products, but the debt office will probably have to offer a small issuance premium on the linker, as it’s a new product.”
The yield on Denmark’s benchmark 10-year bond eased the most in 12 days, falling four basis points to 1.92 percent.
AAA rating
The Danish government is bringing forward its overall debt issuance to take advantage of record-low rates as investors turn away from the euro region and reward governments with stable finances. Denmark’s government has paid less than Germany to borrow for 10 years since Nov. 23.
The Nordic nation, which enjoys a AAA rating, will post government debt of 44.6 percent of gross domestic product this year, compared with an average of 90.4 percent in the euro area, the European Commission said in November.
The debt office said in a separate report yesterday that three quarters of Denmark’s borrowing need for this year have been met as it starts selling bonds to cover its 2013 requirement in a bid to cut funding risks amid persistent market turbulence.
About 75 billion kroner in bonds will be sold this year, the central bank said yesterday in its annual report on government debt and borrowing. This year’s financing need is 28 billion kroner, after the bank sold 124 billion kroner in 2011. The bank has so far sold 20 billion kroner, mostly in 10-and 30- year bonds, this year.
The decision to issue an inflation-linked bond is likely to help reduce the government’s overall interest-rate risk, the central bank said.
“Both Danish and foreign investors are likely to welcome the new linker,” Soerensen at Danske said. “But it all depends on the price, of course.”
--Editors: Tasneem Brogger, Christian Wienberg.
To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net
To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net
