Market Information 9. Vol. - No. 4. April 2008

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1 9. Vol. - No. 4. il 28 Auctions The second auction of Treasury note series RIKB was held on ch 13, 28. Bids were solicited for up to 8, m.kr. nominal value. Bids that were accepted amounted to 2,35 m.kr. nominal value, with an average yield of 9.41%. For two days thereafter, primary dealers were offered the opportunity to purchase 1% of the amount sold in the auction at the average yield. No primary dealer exercised that purchase right. At the end of ch, a total of 13,34 m.kr. nominal value was outstanding in the series. The goal is to sell notes in the series for 35, m.kr. during the current year. Lánasýsla ríkisins - Borgartún Reykjavík Exchange rate index - Sími: Bréfsími: Vefsíða: lanasysla.is - Netfang: lanasysla@lanasysla.is Bloomberg : ICDO On ch 27, a special auction of Treasury note series RIKB was held, in addition to the issue announced in the Government Debt Management Prospect for 28. The objective of the sale was to satisfy market demand for short-term securities carrying a Treasury guarantee. In the auction, primary dealers submitted bids for a total of 7,15 m.kr. nominal value, in addition to the 2 m.kr. that they purchased at the average yield for the competitive part of the auction. The total size of ISK Billion ISK bn. the series is now 22,35 m.kr. nominal value Bond market activity Trading in the secondary market for Treasury notes has been lively so RIKB RIKB RIKB RIKB T-Bills Series jan-7 28-feb-7 3-mar-7 far in 28. For the first 3 months of the year, trading volumes totalled approximately 766 m.kr., which is only slightly less than last year s total turnover of 787 m.kr. HFF bonds turnover has also risen substantially year-on-year, though the increase is not as great as that for T-notes. In 27 HFF bonds turnover totalled 1,56 m.kr., as opposed to 786 for the first three months of the current year. It is notable, however, that while the outstanding amount of HFF bonds is nearly five times greater than that for Treasury notes, the trading volume was very similar in the first three months of the year. This corresponds to a T-note trade velocity nearly five times that for HFF bonds. There could be numerous reasons for this striking difference. First, purchasers of HFF bonds are generally long-term investors who are slower to respond to temporary fluctuations in yield by purchasing and selling housing bonds in the secondary market. Second, Central Bank facilities for primary dealers in T-notes have been gradually increased, and now any primary dealer can borrow up to 5 b.kr. worth of securities in any Treasury note series. The lending facilities offered by the Housing Financing Fund to primary dealers is substantially less, or roughly 1.2 b.kr. for each outstanding HFF bond series. These lending facilities are not included in balance figures when trading velocity is measured. Contributors Bjorgvin Sighvatsson bs@cb.is Jona Gudrun Isaksdottir jgi@cb.is Editor Sturla Pálsson sp@cb.is Information presented in this publication is from the Central Bank of Iceland and from other sources considered reliable. Cut-off date for information was ch 31 st, unless stated otherwise. GDM - Central Bank of Iceland - 15 Reykjavík - Iceland - Phone: Fax: Web: lanamal.is - lanasysla@lanasysla.is - Bloomberg : ICDO

2 9 Vol. - No. 4 il 28 Finally, the greater fluctuations in Treasury note yields over the past few months has spurred more trading in T-notes than in HFF bonds. The fluctuation in yields for example, on short nominal Treasury notes in the past several months indicates that investors short-term expectations concerning yields and inflation are very changeable. Securities lending In view of the heavy trading of Treasury notes in the secondary market, it comes as no surprise that primary dealers have shown considerable interest in borrowing T-notes temporarily. ch 28 was yet another record month in terms of securities lending to primary dealers, with an average balance of 54 b.kr., roughly 8 b.kr. more than in ruary. As the table shows, securities lending has doubled in a single year. The objective of lending facilities to primary dealers is to improve the liquidity of T-notes on the secondary market, thereby promoting more effective price formation for the securities. The table gives the outstanding amount of securities lending, by series, at the end of ch. Lending has been greatest about 2 b.kr. in the shortest series, RIKB Lending has been less brisk in other series. Billion ISK ISK Billion Average Outstanding Amount in the Security Lending Facility Month Outstanding Amount in the Securities Lending Facility by Series At the end of ch, lending of Treasury notes totalled roughly half of the amount sold in the various series. Their current market value is 16 b.kr. RIKB RIKB RIKB Series RIKB RIKB RIKB

3 9 Vol. - No. 4 il 28 Government Debt Benchmark issues, properties and market value Gross Treasury debt, issues and outstanding amount Domestic debt Date of Maturity Type of ket Issues issue date Interest bond Duration Indexed value (ISK m) RIKS /1/1915 1/1/215.% Bullet 7.5 Yes 15,177 Total Treasury bonds 15,177 RIKB /6/26 13/6/28 9.5% Annual int..2 No 15,7 RIKB /12/26 12/12/28 8.5% Annual int..7 No 21,593 RIKB /6/27 12/6/29 8.5% Annual int No 14,562 RIKB /3/24 17/3/21 7.% Annual int No 22,943 RIKB /5/22 17/5/ % Annual int. 4.7 No 21,87 RIKB /2/28 26/2/ % Annual int. 7.1 No 11,472 Total Treasury notes 16,665 Maturity of benchmark bonds 2.95 Total value of marketable issues 121,842 Total market value of benchmark issues Indexed Treasury Bonds 4% Domestic debt - Nominal Amount - millions ISK Redempt./ ket Percent Issues month Issues buybacks month value (ISK m) of dom. RIKS % RIKS ,972 12,972 15,177 1.% Other Treasury Bonds* 74.5% Total Treasury bonds 15,116 15,116 1.% RIKV , 5,.% Total Treasury bills.% RIKB ,174 15,174 15,7 9.9% RIKB , 7,35 22,35 21, % RIKB ,55 15,55 14, % RIKB ,549 25,549 22, % RIKB ,95 25,95 21, % RIKB ,99 2,35 13,34 11, % Total Treasury notes 117,823 16, % Other domestic Treasury debt, (estimate)** 29, % Total domestic debt 151,64 1.% Percent of foreign CHF 2,691 3,67 1.8% EUR 129, ,933 8.% GBP 7,11 7, % JPY 3,63 3, % USD 21,556 25, % Long term debt, total 23,543 1.% Foreign long-term borrowing 58% Treasury Notes 3% EUR.% GBP.% Short term debt, total % Total Foreign debt 23,543 1.% Treasury debt, total 355,183 Domestic debt, percent of total debt 42.7% Other domestic loans 9% * Outstanding amount ** Mostly Government debt due to Landsvirkjun. Redemption profile of Government debt Latest auction result at market value Treasury Bonds T-bills and T-Notes Foreign Debt Acc. bids Total bids Bid to Cover ratio Million Kronas 14, 12, 1, 8, 6, 4, 2, Millions Krona 35, 3, 25, 2, 15, 1, 5, ,2 4,

4 9 Vol. - No. 4 il 28 Securities lending facility and turnover Average amount in the security lending facility of GDM at market value Monthly trading volume in Treasury Notes on OMX Iceland Exchange 3, RIKB 8 RIKB 9 RIKB 1 RIKB 13 RIKB 19 55, 5, 25, Millions Krona 45, 4, 35, 3, 25, 2, 15, 1, Millions Krona 2, 15, 1, 5, 5, Foreign issuance of Icelandic Krona Eurobonds Icelandic Krona Eurobonds Maturity profile Issuer Amount b.kr. Share % Rabobank Nederland % European Investment Bank % KFW Bankengruppe % Inter American Dev. Bank 3. 8% Nordic Investment Bank 21. 6% Toyota 18. 5% Eurofima 16. 4% International Bank for R&D % Rentenbank 9.3 3% European BK Recon & DEV 7. 2% Others % Total % Billion krona I 28 Principal payments IV 28 I I 29 IV 29 I Interest payments I 21 IV 21 I Quarters Icelandic Krona Eurobonds - new issues in ch 28 ISK Eurobonds - Maturing in il Announced Issuer Amount b.kr. Maturity No issues in ch Total. Maturity Issuer Amount b.kr Rabobank EBRD KFW DEBFA Bank Nordhrein-Westfalen Rentenbank 2. Total 18. 4

5 9 Vol. - No. 4 il 28 Yield curves Yield curve Treasury indexed Bonds Yield curve Treasury Bills and Treasury Notes USA UK France Iceland Sweden 5. % 4. % 3. % 2. % 1. %. % -1. % USA UK Iceland Sweden Germany 15. % 13. % 11. % 9. % 7. % 5. % 3. % -2. % Years Interest rates, Borrowing requirement and more 1. % Years Interest rate developments- Treasury Notes and Bills Inflation Premium - Treasury Notes 16.% 15.% 14.% 13.% 12.% 11.% 1.% 9.% RIKB RIKB RIKB RIKB RIKB RIKB CPI Change, Year on Year 1.% 1.% 9.% 9.% 8.% 8.% 7.% 7.% 6.% 6.% 5.% 5.% 4.% 4.% 3.% 3.% 2.% 2.% 1.% 8.% 1.%.% Exchange rate development Interest rate spread RIKB vs 1 year German Bond The exchange rate index CB policy interest rate (%)

6 9 Vol. - No. 4 il 28 Auctions of T-Bills, T-Notes and T-Bonds Auctions in m.kr. from il 27 to il 28 Offers Offers No. of No. of Avg. Min Max Acc. bids Acc. bids Non comp. auction Date Series market v. nominal v. bids acc.bids yield % yield % yield % market v. nominal v. nominal v. T-Notes 18/4/27 RIKB ,28 4, ,219 1,3 13/6/27 RIKB ,29 7, ,399 2,55 18/7/27 RIKB ,468 6, ,494 3, /8/27 RIKB ,29 6, ,87 4,1 19/9/27 RIKB ,48 8, ,986 4, /2/28 RIKB ,71 32, ,897 1, 99 13/3/28 RIKB ,64 9, ,246 2,35 27/3/28 RIKB ,488 9, ,834 7,15 2 Total 81,395 85,3 33,882 35,5 1,995 T-Bills 27/4/27 RIKV ,72 11, ,446 4,6 3/5/27 RIKV ,281 1, ,684 4,85 28/6/27 RIKV ,19 12, ,499 3,62 3/7/27 RIKV ,25 8, ,829 5, 31/8/27 RIKV ,624 7, ,297 4,45 27/9/27 RIKV ,953 8, ,424 3,55 3/1/27 RIKV ,328 13, ,831 5, 29/11/27 RIKV ,66 8, ,826 5, Total 78,98 81,74 34,836 36,7 Buyback: T-Bonds (I/L) and T-Notes 3/4/27 RIKS /5/27 RIKS /6/27 RIKS /7/27 RIKS /8/27 RIKS /1/27 RIKS /11/27 RIKS /12/27 RIKS Total 1,34 1,277 Next planned auction dates: il 17, 28 - Auction Treasury Notes, RIKB Primary Dealers Primary Dealers in Government Securities Telephone Bloomberg-page Glitnir GLB Icebank ICEB Kaupthing Bank KAUP MP Investment Bank MPIB Landsbanki LAIS Saga Capital Investment Bank Straumur - Burdaras Investment Bank STRB 6