(February 22, 2012) — Denmark will issue its first inflation-linked sovereign debt this year in response to demand from pension funds.
The Danish Central Bank announced yesterday that it would issue at least DKK20 billion ($3.6 billion) in inflation-linked notes this year that would mature in 2023.
Ove Sten Jensen, Head of the Government’s debt department, told Bloomberg Businessweek, who initially reported the story: “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.”
Other European countries have issued inflation-linked bonds for some time, which are snapped up by pension schemes as they ideally match portions of their own liabilities.
In the United Kingdom, the National Association of Pension Funds has waged a campaign demanding the Treasury issue more long-dated inflation linked gilts. Compared to swap contracts agreed with investment banks or other market participants, inflation-linked bonds are a relatively cheaper option to hedge out one of pension funds’ major headaches. Pension fund investors have also been hesitant to use derivatives to hedge out inflation and other types of risk despite being increasingly concerned with how these aspects could affect their funding ratio.
Corporate issuers have also tapped investor appetite for these products. In the past couple of months, Royal Bank of Scotland and retailer Tesco have issued large inflation-linked bonds that were met with high demand from the market.
Denmark is AAA-rated by the major agencies and has seen its borrowing costs fall in recent months as investors have seen it as a ‘safe haven’ outside the Eurozone.