Issuance Strategy

The prospect of falling central-government debt in the coming years entails a need to adjust the central government's issuance policy. The strategy will be to concentrate issues in fewer government securities with focus on the 10-year maturity segment. If the borrowing requirement is sufficiently large, issuance may also take place in a shorter maturity segment in order to fill out the gaps in the central government's redemption profile.

In 2006, the central government will concentrate issuance in the newly opened 10-year government series, 4 per cent bullet loans 2017. In addition, the existing benchmark securities will be built up to the minimum volumes announced. The central government will not raise any euro loans in 2006. To support the borrowing requirement in 2006, the central government may buy back domestic and foreign government securities.

4.1 ISSUANCE STRATEGY

Since 1997, Denmark has by and large had a government budget surplus, and the central-government debt has decreased from DKK 600 billion to just over DKK 400 billion, cf. Chart 4.1.1. The Chart also shows debt projections for different levels of budget surpluses in the coming years.

In recent years, the issuance policy has been adjusted on an ongoing basis to ensure liquid on-the-run issues. Primarily the outstanding volume of domestic securities has been adjusted following the reduction of the debt. For example, the number of on-the-run Treasury notes was reduced from two to one in 1998, and in 2001 issuance in 7 per cent bullet loans 2024 was discontinued in order to concentrate issuance in the 10-year maturity segment. Most recently, in 2005, 4 per cent bullet loans 2008 was used as the 2-year on-the-run issue instead of opening a new issue.

The prospect of sustained government budget surpluses in the coming years further reduces the need to sell government securities. It is therefore no longer expedient to build up new liquid securities in all three maturity segments (2, 5 and 10 years), cf. Chart 4.1.2.

Issuance will take place in fewer securities in order to ensure that government securities will continue to reach an outstanding volume that provides for the reduction of borrowing costs via a liquidity premium.

The issuance strategy will focus on:

• building up securities in the 10-year maturity segment to a final outstanding volume of around DKK 50 billion,
• building up securities with a shorter maturity, aimed at filling out the gaps in the central government's redemption profile,
• small issues, in the event of unusual market conditions, in other government securities.

In future, most government issues will be concentrated in 10-year government bonds, with an expected final outstanding volume of around DKK 50 billion. The central government normally has a comparative advantage in the long segment owing to its high credit rating. Moreover, the 10-year maturity segment is considered a key point on the government yield curve, both in Denmark and internationally. Furthermore, market participants have expressed a wish for a liquid 10-year point on the government yield curve, rather than shorter issues for which there are several substitutes such as uncallable short-term mortgage-credit bonds.

If the borrowing requirement is sufficient, the intention is to merge the previous 2- and 5-year issues into one issue aimed at filling out the gaps in the central government's redemption profile. For instance, government securities maturing in 2012, 2014 and 2016 might be issued, cf. Chart 4.1.3. This will help to smooth the government's borrowing requirement and thus underpin a stable issuance policy. Issuance in shorter maturity segments can also contribute to diversification of the investor base.

An active buy-back policy will still be pursued in order to support the building up of new government securities. Buy-backs in recent years have taken place on MTSDenmark. In 2006, further initiatives are planned in connection with buy-backs, including the use of buy-back auctions on MTSDenmark, cf. Chapter 5.

4.2 STRATEGY AND BORROWING REQUIREMENT IN 2006

Budget and financing requirement 2006
At the end of January, the central-government borrowing requirement in 2006 was calculated at DKK 12.2 billion, cf. Table 4.2.1. The low borrowing requirement reflects expectations of a government budget surplus in 2006, and also that the surplus sale of government securities in 2005 was carried forward to 2006. At the same time, redemptions on the domestic and foreign debt are relatively small. In view of the low borrowing requirement, the central government will not issue any euro loans in 2006. In 2006, the central government will support the building up of the new 10-year issue via buy-backs. Buy-backs are possible in all domestic and foreign government securities in 2006, except the benchmark issues and 4 per cent bullet loans 2017. In January 2006, buy-backs of government securities maturing after 2006 totalled DKK 1.1 billion. The borrowing requirement is updated on an ongoing basis at www.nationalbanken.dk under Government debt.

Sales and opening of a new issue
On 26 January, a new 10-year issue, 4 per cent bullet loans 2017, was opened. On the opening day, the maximum amount offered of DKK 5 billion was sold at an average yield to maturity of approximately 3.5 per cent. The outstanding amount of DKK 5 billion ensured market making. This issue is expected to reach a final outstanding amount of around DKK 50 billion, of which approximately DKK 25 billion is expected to be issued in 2006, cf. the benchmark strategy in Box 4.1.

The 5-year issue, 4 per cent bullet loans 2010, is expected to reach a minimum of DKK 35 billion during 2006, and the 10-year issue, 4 per cent bullet loans 2015, a minimum of DKK 60 billion. In the event of unusual market conditions, small supplementary issues in the other government securities maturing after 2006 are possible.

In 2006, the net financing requirement from the Treasury bill programme is expected to be zero. Liquidity in Treasury bills may be supported if a new exchange facility is introduced in 2006, whereby government bonds maturing within a year may be exchanged for Treasury bills, cf. Chapter 5.

The interest-rate risk on the central-government debt portfolio will continue to be governed by the Macauley duration of 3 years ± 0.5 years in 2006. The duration is managed by means of interest-rate swaps. In day-to-day risk management, a target band of 3 years ± 0.25 years is applied to a duration based on a fixed rate of interest and a balance of the central government's account of DKK 30 billion, cf. Chapter 8.