Norway faces liquidity shock in record redemption

Krone Weakness

Norway has held three auctions this year, selling a total of 10 billion kroner in the three separate bond issues. While it has only one auction scheduled next month, it plans for two sales in April and three in May, including one which settles on the day of the record buyback.

“Norges Bank is doing what they can to keep the assets in krone but we do expect to see some leakage out of the currency,” Brun said. “We expect to see krone weakness in the period leading up to the maturity date.”

The central bank will sell 70 billion kroner of long-term debt this year, it said on Dec. 20. It increased the number of government bond auctions to 21 from 17 even as the number of Treasury bill sales drops, it said. The government plans to borrow 12 billion kroner to 16 billion kroner in the bond market during the first quarter.

Light Calendar

The auction calendar remains “particularly light in March and April,” said Langeland. “This may be a blunder as it is precisely in this period that spreads tend to widen.”

Swap spreads, or the difference between interest rate swaps and the yield on government debt, tend to widen between 15 basis points to 20 basis points in the two months to three months before bond redemptions, he said.

The government said that while it’s flexible, the oil-rich nation has no special need to cater to investor demands. Norway is western Europe’s largest crude and gas exporter and has a $700 billion sovereign wealth fund. The government takes about 4% of the fund each year to plug budget deficits.

“We have flexibility generally to adapt to what we think is the demand,” Sigurd Klakeg, deputy director general at the Norwegian Finance Ministry, said by phone Jan. 25. He declined to comment on whether the bank will increase the size of its issuance before the 6.5% bond matures. “It is not necessary for us because we have flexibility with a fairly substantial cash reserve,” he said.

Pose Challenges

The strength of the krone may also pose challenges to investors. The currency on Feb. 13 climbed to a record on an import-weighted basis, and has since weakened about 2%.

The strength may make investors hesitant to reinvest into comparatively more-expensive debt, Brun said.

Still, in a world still concerned about the depth of Europe’s crisis, Norwegian bonds are likely to find a home. If there are enough of them, that is.

“I suspect those international buyers who own the bonds bought them for defensive positioning, so I can’t see that has changed,” said Russell Silberston, a fund manager in London at Investec Asset Management Ltd. “Yields are relatively high, debt dynamics are the best in the world and the currency is strong.”

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