Denmark to Issue First Inflation-Linkers | Chief Investment Officer

(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.

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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.

Following on the heels of Norway and oil-rich states in the Middle East, Western Australia's Premier Colin Barnett has expressed plans to form its own sovereign-wealth fund to better harness its natural resources.

(February 21, 2012) — Australia’s wealthiest state in terms of resources is set to create its own sovereign wealth fund, despite criticism that the country’s superannuation system does not need the backup.

Western Australia’s premier Colin Barnett said that the investment vehicle will be comparable to the existing 73.07 billion Australian dollar (US$78 billion) Future Fund set up by the Commonwealth government in Canberra, the Wall Street Journal initially reported. The fund, which will aim to store away earnings from the sale of vast quantities of iron ore and minerals to Asia, follows in the footsteps of the Abu Dhabi Investment Authority and Norway’s sovereign wealth fund, whose successes have largely been driven by revenues from the regions’ abundant natural resources.

“Despite the fact that Western Australia is clearly the powerhouse driving the nation’s economy—we have the highest forecast growth in the country—rising state debt is the constraint on our economic growth,” Barnett told the WSJ.

Last year, Barnett revealed that the state was considering a Norway-style sovereign wealth fund so future generations can benefit from its buoyant resources sector. “The West Australian government is looking at setting up a state wealth fund so that we would potentially put some share of royalty income or some share of budget surpluses into a fund for the future,” Barnett said in April of last year, the Sydney Morning Herald reported.

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While trade unions and institutions worldwide have urged the Australian government to create a sovereign wealth fund, Australia’s Prime Minister Julia Gillard has asserted that superannuation is already a trillion-dollar sovereign wealth fund–but with market benefits. “That’s because it’s privately managed by thousands of trustees, instead of a sovereign wealth fund managed centrally by a Canberra-appointed manager,” she said.

Click here to see GC Australia — a sister publication to aiCIO — that focuses on the Australian superannuation and alternative fund industry, from a securities services perspective.