CHAPTER 11

Issuance Strategy in the Coming Years

Borrowing requirements are set to be large in the coming years, and hence there is a need to adapt the issuance strategy. The strategy is to is sue liquid bonds in the 2-, 5- and 10-year maturity segments on the basis of a 40-20-40 percentage distribution. In addition, issuance of T-bills will be resumed.

When determining the strategy, emphasis has been placed on issuing in in ternationally recognised benchmark segments. At the same time, bond series will be built up to a volume for which investors are willing to pay a premium for high li quid ity. In addition, the strategy entails a smooth redemption profile.

Consolidation of Central-Government Borrowing 11.1

The central government's issuance strategy is designed to support a liquid domestic market for government securities. Investors are willing to pay a premium for high liquidity, thereby allowing the central government to cover its borrowing requirement at a lower rate of interest. A prerequisite for a liquid market for government bonds is that bond series are built up to a large outstanding volume. In addition, it is important to have a framework that supports a well-functioning government bond market with efficient trading on electronic platforms.

In the period until 2005, the issuance strategy was based on a 40-20-40 percentage distribution on the 2-, 5- and 10-year maturity segments, cf. Chart 11.1.1. Large government surpluses in the period 2005-08 meant that the central government did not really have a borrowing requirement during this period. Consequently, bond issuance was concentrated on the 10-year maturity segment and T-bills were phased out.

issuance of Domestic government securities	Chart 11.1.1
Note:In context of the financial crisis, there was in 2008 extraordinarily issuance in the 2-year segment and the 30-year bond was issued to the pension sector.

In 2007, Government Debt Management analysed the future per spect ives of the market for government securities in the report Government Debt Policy in the Light of Falling Debt¹. The analysis showed that the central government would still have a borrowing requirement until 2015, and that there would be costs involved in re-establishing a borrowing programme. In addition, the analysis showed that government securities contribute to an efficient financial market due to their role as price reference and investment objects. Against this background, it was decided to continue issuance of government bonds.

In order to ensure a liquid market for government securities, the is suance strategy adopted was to build up a 10-year series to a volume of around DKK 50 billion over a 2-year period. The plan was to assess the strategy after 3-4 years.

The Crisis Has Led To Government Budget Deficits 11.2

In 2009, the borrowing requirement rose substantially, mainly on account of the financial crisis and the economic slowdown. As a result, the is su ance strategy was adjusted by opening a new 2-year series and re sum ing issuance in the 5-year segment, cf. Chapter 3.

Looking ahead, the government budget is set to deteriorate sub stan tial ly compared with the scenario outlined in the government report Towards New Goals – Denmark 2015, which formed the basis for the report on falling debt. This reflects a weakening of the structural balance as a result of "…the growth-accommodating fiscal policy, lower po tential GDP due to the crisis and growth in public service ex pend itures"² .

Government Debt Management has made a technical projection of the development of government finances, cf. Chart 11.2.1. The prospect of a period of budget deficits entails a need to adjust the issuance strategy.

Projection of government finances	Chart 11.2.1
Note: The technical projection is based on Economic Survey, December 2009 for the years 2010 and 2011. The projection hereafter is based on convergence to a balanced budget in 2015. The Denmark 2015 plan was published in the report Towards New Goals – Denmark 2015. Source: Economic Survey, December 2009 and Towards New Goals – Denmark 2015.

Issuance Strategy to Match a Higher Borrowing Requirement 11.3

Government debt policy in Denmark will continue to focus on issuance in large and liquid bond series. With prospects of government budget def icits in the coming years, it is necessary to build up liquid bond series in other maturity segments besides the 10-year segment. The strategy is to issue bonds in the 2-, 5- and 10-year segments on the basis of a 40-20-40 percentage distribution. The strategy is:

• Opening a 2-year on-the-run issue every year
• Opening 5- and 10-year on-the-run issues every other year.

To ensure a smooth redemption profile, the 5- and 10-year on-the-run issues will mature in different years. In addition, T-bills will be issued.

When determining the strategy, emphasis has been placed on issuing in internationally recognised benchmark segments, in which series are built up to a volume that is sufficiently large to support liquidity.

Choice of issuance segments
Internationally, the 2-, 5- and 10-year benchmark segments are among the most important segments, cf. Table 11.3.1. Issuances in these segments are attractive for a broad group of domestic and foreign investors, which contribute to reducing the central government's borrowing costs. Issuance in different segments helps to ensure a broad investor base, thereby re duc ing the risk of declining investor interest in specific segments.

Build-up of liquid bonds and a smooth redemption profile
The financial turmoil has highlighted the importance of a liquid market for government securities. To achieve this, bond series must be built up to a sufficiently large volume. The number of issuance segments is therefore limited in order to ensure liquidity. As a result, small countries and coun tries with low debt typically spread their issuance on fewer maturity seg ments.

Based on a technical budget projection and the issuance strategy the average annual borrowing requirement is approximately DKK 100 billion until 2020, cf. Chart 11.3.1. This entails average annual issuance around DKK 40 billion in the 2- and 10-year series and around DKK 20 billion in the 5-year series. Hence, the 2- and 5-year series will be built up to a final outstanding volume of approximately DKK 40 billion and the 10-year series to approximately DKK 80 billion.

Central-government borrowing requirement based on the technical projection	Chart 11.3.1
Note: Redemptions are based on a 40-20-40 percentage distribution of issuances in the 2-, 5- and 10-year segments. Source: Economic Survey, December 2009 and own calculations.

The international standard is to build up series of government securities to at least EUR 5 billion to ensure they can be traded on international electronic platforms. 10-year bond series are often larger.

In addition to providing a liquid range of on-the-run issues, the strategy ensures a relatively smooth redemption profile. This reduces the risk that the central government will have to refinance very large volumes in unfavourable market conditions.

A Robust Strategy if the Government Budget Deteriorates 11.4

The government budget is primarily influenced by economic develop ments. When the economy is shifting, government budget estimates are sub ject to greater uncertainty. Consequently, Government Debt Man age ment has performed a scenario analysis in which the technical budget projection is supplemented with a stress scenario with slower convergence towards government budget balance, cf. Chart 11.4.1. In the "larger deficit" scenario, the average annual borrowing require ment increases to DKK 150 billion. Maintaining the 40-20-40 issuance strat egy would mean building up the 2- and 5-year series to around DKK 60 billion and the 10-year series to DKK 120 billion, which is the bench mark in many euro area member states. The issuance strategy is thus re sili ent to a pronounced deterioration of the government budget.

stress scenario for government budget deficits	Chart 11.4.1
Anm.: Afdrag er baseret på en 40-20-40 procentuel udstedelsesstrategi i de 2-, 5-, og 10-årige løbetidssegmenter. Kilde: Økonomisk Redegørelse, december 2009 og egne beregninger.

If the government budget deteriorates further, the issuance strategy can be adjusted, either by opening new series more frequently or by issu ing other types of loans. If the government budget improves significantly, with large surpluses for a number of years, issuance can be consolidated in fewer segments.