CHAPTER 3

Borrowing in 2009

At the beginning of the year, domestic central-government borrowing focused on building up the 10-year on-the-run issue. In view of the up ward adjustment of the borrowing requirement, the issuance strategy was changed in the 2nd half of the year, with an equal distribution on the 2- and 10-year maturity segments. In addition, issuance in the 5-year seg ment was resumed. Domestic borrowing totalled DKK 117 billion, DKK 14 billion higher than the borrowing requirement. This reflects that Gov ernment Debt Management began to finance the 2010 borrowing requirement towards the end of the year.

In response to interest from market participants and against the back drop of lower liquidity in the secondary market, Government Debt Man age ment introduced regular auctions, supplemented with tap sales.

In the 1st half of the year, the central government raised medium-term and long-term foreign debt in order to increase the foreign-exchange re serve. At the same time, the central government's short-term foreign debt was re duced. The central government's foreign debt increased by DKK 6 billion in 2009

Development in Danish Government Yields 3.1

Danish government bond yields remained low in 2009, reflecting factors such as expansionary monetary policies and sustained demand for low-risk bonds among investors.

Reductions in the key interest rate of the European Central Bank, ECB, and narrowing of the Danish monetary-policy interest-rate spread to the euro area meant that short-term government bond yields fell in 2009, cf. Chart 3.1.1. Long-term yields remained broadly unchanged throughout the year.

Yields to maturity of benchmark securities	Chart 3.1.1

Expectations that the Danish monetary-policy interest-rate spread to the euro area would narrow implied that at the beginning of 2009 the yield curve was inverted until the 2-year segment, cf. Chart 3.1.2. Interest-rate reductions caused the yield curve to steepen in 2009.

Zero-coupon yield curves	Chart 3.1.2

Yield Spreads to Germany 3.2

The Danish yield spread to Germany widened at the end of 2008, as did those of other countries, cf. Chart 3.2.1. This was attributable to the special status of German government bonds in periods of financial turmoil as these bonds have high liquidity and credit ratings. As the financial markets gradually stabilised in 2009, yield spreads narrowed.

2- and 10-year yield spreads to Germany	Chart 3.2.1
Source: Bloomberg.

The 2-year yield spread was relatively high in 2009 compared with those of euro area member states, reflecting the monetary-policy interest-rate spread to the euro area. In addition, the ECB's unlimited 1-year credit facil ity entailed strong demand for short-term bonds denominated in euro. Unlike short-term krone-denominated bonds, these can be pledged as collateral for liquidity from the ECB.

Denmark's high credit standing contributed to a narrow 10-year yield spread to Germany in 2009 compared with those of the euro area mem ber states, cf. Chart 3.2.2.

Average 10-year yield spreads to germany, 2009	Chart 3.2.2
Note: Yield spreads adjusted for maturity differences. The yield spread for Denmark is based on bonds in kroner. Source: Bloomberg.

Domestic Borrowing 3.3

In December 2008 the strategy for issuance of domestic government bonds in 2009 was laid down on the basis of an expected domestic bor row ing requirement of DKK 40 billion. The issuance strategy focused pri marily on building up the new 10-year series, 4 per cent bullet loans 2019, which was opened in January 2009. This series replaced 4 per cent bullet loans 2017 as the 10-year on-the-run issue.

In response to expectations of a greater issuance requirement and con siderable demand in the short-term maturity segment, Government Debt Management in April opened a new 2-year on-the-run issue, 4 per cent bul let loans 2012. This series replaced 4 per cent bullet loans 2010, which had been built up to its benchmark volume and had a remaining term to maturity of less than two years.

Adaptation of issuance strategy to increased borrowing requirement
In Budget Outlook 1, May 2009 the borrowing requirement was adjusted upwards to DKK 82 billion, cf. Chart 3.3.1. This was mainly attributable to the weaker economic situation. Consequently, issuance was stepped up in the 2nd half of the year, and the strategy was adjusted, with an equal dis tribution on the 2- and 10-year segments. In addition, issuance in the 5-year maturity segment was resumed.

Accumulated sales and borrowing requirement, 2009	Chart 3.3.1
Anm.: Der blev endvidere udstedt for 0,9 mia.kr. i det 30-årige segment.

Domestic government bonds issued in 2009 totalled DKK 117.0 billion, cf. Table 3.3.1, DKK 13.7 billion higher than the borrowing requirement. This reflects that Government Debt Management began to finance the 2010 borrowing requirement.

Issuance primarily took place in the 2-year and 10-year maturity seg ments. The distribution on 4 per cent bullet loans 2012 and 4 per cent bul let loans 2019 was almost equal. In addition, issuance of DKK 12.5 billion took place in the 5-year segment, as well as a small volume of issuance in the 30-year segment.

Issuance via auctions
In response to interest from market participants and against the backdrop of lower liquidity in the secondary market, Government Debt Manage ment in June supplemented its issuance on tap with two auctions, cf. Chapter 6. In the auctions, sales reached the announced maximum of DKK 4 billion, with bids exceeding DKK 8 billion at both auctions.

Market participants indicated that the auctions generated increased awareness of and interest in government bond issuance, particularly among large investors. The auctions encouraged banks to intensify their marketing of Danish government securities. In addition, the auctions provided an updated price picture, which was at times difficult to obtain in the secondary market. On account of this positive experience, Gov ernment Debt Management introduced regular auctions from Sep tem ber, cf. Chart 3.3.2.

Issuance distributed by sales method, 2009	Chart 3.3.2
Note: For auctions, the chart shows issuance at trading days.

Overall, auctions accounted for half of the domestic sales of govern ment securities. At the same time, issuance of government bonds on tap continued.

Buy-Backs 3.4

Buy-backs of government bonds in the market were not extensive in 2009. Focus was on meeting the financing requirement.

Buy-backs of government bonds in the market totalled DKK 9.1 billion, cf. Table 3.4.1. Buy-backs primarily took place in connection with two switch auctions between 4 per cent bullet loans 2012 and 4 per cent bullet loans 2010. In addition, buy-backs took place in 4 per cent bullet loans 2015 and 4 per cent bullet loans 2017, reflecting the investment needs of the government funds.

Foreign Borrowing 3.5

The foreign debt is issued in order to maintain an adequate foreign-exchange reserve. In the 2nd half of 2008, the central government's Com mercial Paper, CP, programmes were used to rapidly increase the foreign-exchange reserve, cf. Box 3.1. In the context of the financial tur moil, it was found to be appropriate to increase the central govern ment's con tri bu tion to the foreign-exchange reserve at the beginning of 2009. In ad dition, the strategy entailed shift of the outstanding volume in the central government's CP programmes to medium-term and long-term borrowing.

Concentration of issuance in the 1st half of the year
Considerable uncertainty in the international borrowing markets and a higher issuance requirement called for flexibility in the issuance strategy, in terms of both maturity segments and currencies.

In the 1st half of 2009, the central government raised medium- and long-term foreign debt totalling DKK 82.2 billion (EUR 11.0 billion), cf. Table 3.5.1, primarily in 3-year dollar loans and a 5-year euro loan. Most of the loans were syndicated, cf. Box 3.2. The dollar loans ensured a broader investor base, and combined with currency swaps into euro this was cheaper than borrowing directly in euro. In addition, there was fierce competition for euro loans from issuers with the euro as their domestic currency.

Syndication of the euro and dollar loans ensured a broad distribution of the investor base in terms of both the number of investors and investor types, cf. Chart 3.5.1. Banks, central banks and portfolio managers ac quired approximately 80 per cent of the loans. Central banks were par ticu larly represented in the dollar loans, while portfolio managers ac quired a larger share of the euro loan.

Investor distribution of Euro and dollar loans issued in 2009	Chart 3.5.1

While the central government raised medium- and long-term foreign debt, its short-term foreign debt was reduced in the 1st half of the year, so that the CP programmes once again functioned as a contingency measure for quick procurement of foreign exchange.

In the 2nd half of the year, the foreign-exchange reserve increased fol low ing intervention purchases by Danmarks Nationalbank in the mar ket, cf. Chart 3.5.2. Against that background, it was decided not to re fi nance for eign debt maturing in the 2nd half of the year. The central gov ern ment's foreign debt increased by DKK 6.3 billion net in 2009, cf. Table 3.5.2.

decomposition of changes in the foreign exchange reserve	Chart 3.5.2
Note:The central government's contribution to the foreign exchange reserve is the sum of short and long-term net foreign borrowing. The foreign exchange reserve was DKK 164.0 billion at the end of July 2008 and DKK 394.6 bil lion at the end of 2009.

Increased focus on investor relations
The combination of higher domestic and foreign borrowing require ments, absence of the central government in the foreign borrowing mar kets in recent years, increased competition due to a larger supply of bonds, and a wish for more information about the Danish economy among some investors makes it appropriate to maintain closer contact with investors. This strategy involves more regular contacts with large in sti tutional investors outside Denmark. The aim is to ensure investor inter est in domestic and foreign issuance by the Danish government, both in the short term and in the long term.

The Central Government's Account 3.6

The central government holds liquid funds in its account at Danmarks Nationalbank. The balance of the central government's account has in creas ed in recent years, reflecting continued issuance of government bonds during a period in which the central government had practically no bor rowing requirement. In addition, the balance of the central gov ern ment's account rose sharply towards the end of 2008 due to the 30-year issuance as well as an increase of the foreign debt. The proceeds from the increase in the central government's foreign debt have been set aside in the account for foreign redemptions, cf. Chart 3.6.1.

The central government's account, 2009	Chart 3.6.1

Government capital injections into banks and mortgage-credit institutes and most re-lending to the Financial Stability Company were financed by drawing on the central government's account. While other countries were dependent on raising loans in order to finance their financial rescue packages, Denmark had greater flexibility, owing to the large balance of the central government's account.

Ownership Distribution of Domestic Government Securities 3.7

At the end of 2009, the non-resident ownership share was around one third of krone-denominated Danish government bonds. Non-residents primarily own short-term government bonds, cf. Chart 3.7.1.

Ownership shares of domestic securities, end-2009	Chart 3.7.1
Note: Ownership shares exclude the government bond portfolios of the government funds. The 2-year segment com prises government bonds with term to maturity of up to 3.5 years, the 5-year segment comprises government bonds with term to maturity from 3.5 to 6.5 years, the 10-year segment comprises government bonds with term to maturity from 6.5 years to 15 years, and the 30-year segment comprises 4.5 per cent bullet loans 2039. Source: Danmarks Nationalbank, Securities Statistics.

The insurance and pension sector is the largest investor group with an ownership share of just under 50 per cent, primarily in the longer maturity segments. The Danish pension companies have long-term commitments and therefore have a natural interest in long-term issues. The ownership distribution for domestic government bonds remained broadly unchanged throughout 2009.