Quarterly report 2 I 2016

Transcription

1 GOVERNMENT DEBT MANAGEMENT Quarterly report I 6 JULY 6 Government Debt Management Debtmanagement@Norges-Bank.no Tel.: +7 7

2 Quarterly report I 6 JULY 6 Government Debt Management Debtmanagement@Norges-Bank.no Tel.: +7 7 Summary In Q, five government bond auctions and five Treasury bill auctions were held. All together, NOK bn was borrowed in the market. Contents page Report for the quarter Market update Government bond auctions Treasury bill auctions Turnover, government securities Ownership composition, government securities Interest rate swaps Interest rate risk Refinancing risk Credit risk Tables 7 Debt outstanding Auctions Interest rate swaps entered into Charts 8 Market update Auctions Turnover Ownership composition Interest rate swaps Interest rate risk Refinancing risk Credit risk/counterparty risk Mandate 6 Annual limits Management mandate Primary dealers 6 Risk 6 Definitions 8 Figures and calculations 9 Market update At the end of 6 Q, the synthetic Norwegian -year yield was at its lowest level ever,.%, compared with.% at the end of Q. Through the quarter, the yield varied between.% and.%. In the quarter as a whole, yields rose on the two shortest government bonds, NGB /7 and NGB /9, by 8 and basis points, respectively. The yields on the remaining bonds fell by between 7 and basis points. The bonds with the longest maturities showed the most pronounced decline. Thus, the yield curve was somewhat flatter at the end of of Q than at the end of Q (Chart.). There were substantial market movements related to the UK referendum on continued EU membership. This also affected the Norwegian government securities market. In the course of June, the day after the referendum, yields on all Norwegian bonds fell by between and basis points. For all bonds, this was the largest intraday change in Q. On the morning of June, following an agreement with Norges Bank, primary dealers chose to quote three times the interest rate spreads between bid and offer prices on all government securities. The justification was the market turbulence following the referendum. On the following three trading days, 7-9 June, primary dealers were allowed to quote two times the interest rate spreads. The yield on German -year government bonds fell by 8 basis points in Q, while the German three-year yield fell by basis points. The yield differential against Germany in the -year segment (measured as the difference between the synthetic Norwegian bond yield and the yield on the German bond with residual maturity closest to years) was basis points at the end of Q, compared with basis points at the end of Q. In Q, the differential was in the interval - basis points. The average so far in 6 is basis points. The yield differential against Sweden rose from to 7 basis points, while the yield differential against the US became less negative in Q (Chart.6). The yield differential against the UK rose from minus to plus basis points in Q. On the day after the referendum, the yield differential against the UK rose from to basis points. At the end of Q, the swap spread (the yield differential between the synthetic Norwegian government bond yield and the swap rate) in the -year segment was minus basis points, compared with minus basis points at the end of Q. So far in 6, the average swap spread is minus 6 basis points, with a range of between minus 8 and minus 9 basis points in the - year segment. Government bond auctions In 6 Q, five government bond auctions were held for a total of NOK bn in the market. A planned issue volume of NOK bn- 7bn for Q had been published. The new -year bond, NGB /6, which was issued in February, was reopened in three separate auctions for NOK bn each. In addition, NGB /9 and NGB / were reopened for NOK bn each. Demand in the five auctions varied somewhat, but was slightly higher than in Q. The average bid-to-cover ratio.96 and. in Norges Bank / Government Debt Management

3 Total volume outstanding at June 6 Bonds NOK 77.7bn, of which NOK 6bn in the government s own stock Bills NOK 88bn, of which NOK bn in the government s own stock Borrowing year-to-date Bonds NOK bn to the market. In addition, NOK 8bn to the government s own stock Bills NOK bn to the market. In addition, NOK 6bn to the government s own stock Auctions in 6 Q Bonds 6 April NGB /6 NOK bn April NGB /9 NOK bn May NGB /6 NOK bn May NGB / 8 June NGB /6 NOK bn NOK bn Bills April NTB /7 NOK bn April NTB 9/6 NOK bn May NTB /6 NOK bn June NTB 6/7 NOK 6bn In addition, NOK 8bn to the government s own stock 7 June NTB 6/7 NOK bn Q and Q, respectively, while the average for - was.8. There was also somewhat firmer demand for government bonds with longer maturities than for bonds with shorter maturities. Auction results, measured as the spread above the ask yield in the secondary market at the time of the auction (yield at a.m. on Oslo Børs), were relatively good. For the government, a low spread represents a good auction result, since the allotment yield is close to the corresponding secondary market ask yield. The average auction result was basis points above the secondary market ask yield in Q, while in Q it was basis points. For the years, the average auction result was basis points above the secondary market ask yield. In the auction of NGB /6 in June, the allotment yield was basis points below the secondary market ask yield. No auctions have had a better auction result in the period -6. Allotment yields have also been low compared with auction results back to. The auction of NGB /9 in April resulted in an allotment yield of.7%. This is the lowest allotment yield in a government bond auction in the period -6. Treasury bill auctions In 6 Q, five Treasury bill auctions were held. In April, NTB /7 and NTB 9/6 were reopened for NOK bn each, while in May, NTB /6 was reopened for NOK bn. In June, a new Treasury bill, NTB 6/7, was issued for NOK 6bn to the market and NOK 8bn to the government s own stock. This bill was reopened for NOK bn later in June. Originally, a planned issue volume of NOK bn-8bn for Q and up to NOK 9bn for 6 had been published. On 6 May this was revised to NOK 9bn-bn for Q. Treasury bills worth NOK bn were issued to the market in Q. On 9 June the previously published borrowing interval of up to NOK 9bn in Treasury bills for 6 was reduced to NOK 8bn. Demand for Treasury bills was somewhat lower in Q, with an average bid-to-cover ratio of.8, compared with. in Q. For the period - it was. (Chart.). In the reopenings in Q, the average allotment yield was basis points above the ask yield in the secondary market at the time of the auction, compared with 6 basis points in 6 Q. The average for the years - was basis points. Allotment yields have been low compared with previous auction results. Buyback auction NGB /7 In 6 Q, one buyback auction, of NGB /7 (NST 7), was held. NOK m was bought back and written down two days later, on June 9. Buyback auctions are held as American (multiple-price) auctions. The lowest accepted yield in the auction was.% and the weighted average effective yield was.6%. Buybacks 7 June NGB /7 NOK.bn Norges Bank / Government Debt Management

4 Maturities in 6 Q Bills June NTB 6/6 NOK 6bn, of which NOK 8bn was the government s own stock Planned borrowing for 6 Bonds NOK bn-8bn Bills Up to NOK 8bn Borrowing interval in 6 Q Bonds NOK 7bn-bn Bills NOK bn-bn Auction dates in 6 Q Bonds August September 8 September Bills August September 9 September Buyback of NGB /7 August 8 September Maturities in 6 Q Bills September NTB 9/6 NOK 8bn, of which NOK 8bn is the government s own stock Turnover, government securities In 6 Q, the total turnover of bonds recorded on Oslo Børs amounted to NOK 8bn, or an average of NOK.bn per day (Chart.). So far in 6, average daily turnover is approximately NOK.bn, the same as in. In Q, bond NGB /6 showed the highest turnover, with % of the total. Of the remaining bonds, NGB / and NGB /7 had the highest shares of total turnover, with % and %, respectively. In Q, the total turnover of Treasury bills recorded on Oslo Børs amounted to NOK bn, or an average of NOK 69m per day (Chart.).So far in 6, average daily turnover is around NOK 7m, at the same level as in the first half of. The shortest Treasury bills accounted for the majority of the turnover. The government has its own stock of NOK 8bn of each government security for use in repurchase agreements with primary dealers. Under these agreements, primary dealers can temporarily purchase government securities from the government with a simultaneous agreement to sell back the securities. In Q, average daily usage of the facilities for Treasury bills was around 8%, compared with % in Q (Chart.8). Average daily facility usage for bonds was % in Q, compared with % in Q (Chart.7). Ownership composition, government securities At the end of 6 Q, approximately 9% of Norwegian government bonds was owned by foreign investors (Chart.), compared with an ownership share of 6% at the end of Q. At the same time, the share held by banks rose from around % to %. The shares held by the remaining sectors have shown little change. The government s own stock is included in the share held by the government sector (central government and social security funds). The volume of bonds outstanding increased by NOK bn in Q. Banks, foreign investors and the government sector increased their holdings of Norwegian government bonds by NOK bn, NOK.bn and NOK.bn, respectively. The increase in the foreign sector s holdings partly reflects purchases of the two longest government bonds, NGB /6 and NGB /. At the same time, sales by the foreign sector included NGB /7 and NGB /. In the remaining sectors, changes in holdings are under NOK bn. At the end of Q, foreign investors owned % of Norwegian Treasury bills. Life insurance companies and pension funds held % and banks held 8%. These sectors are the largest Norwegian holders of Treasury bills. In Q, Norwegian mortgage companies reduced their holdings of bills by NOK.7bn, so that they held approximately % of the volume outstanding. Otherwise, there have only been minor changes in other sectors holdings. All turnover of Norwegian government securities where one or both parties are members of Oslo Børs. Norges Bank / Government Debt Management

5 Interest rate swaps No new interest rate swaps were entered into in 6 Q. Three agreements with a total volume of NOK.bn matured. Interest rate risk At the end of 6 Q, the portfolio of Treasury bills and government bonds had an average time to refixing of. years. At the same date, the portfolio of interest rate swaps had an average time to refixing of.9 years. This reduced the average time to refixing of the debt portfolio as a whole (government debt including interest rate swaps) to.8 years (Chart 6.). The average time to refixing of the debt portfolio was unchanged since the end of 6 Q. The Ministry of Finance has set a minimum average time to refixing of. years. For 6, the aim of Government Debt Management is for the average time to refixing not to be substantially shorter than. years. The average time to refixing summarises the entire maturity profile of the debt portfolio in a single number and does not contain information about the absolute size or the spread of the government debt portfolio s interest rate exposure across the yield curve. Very different portfolios may have the same average time to refixing. Chart 7. shows the maturity structure of the government s portfolio of Treasury bills and government bonds. As the chart shows, the government s interest rate exposure is relatively well spread across maturities out to years. Refinancing risk According to the mandate issued by the Ministry of Finance, the borrowing strategy shall be formulated so that less than % of government bonds outstanding will mature each year. Chart 7. shows future redemptions as a percentage of the nominal volume of government bonds outstanding at the end of 6 Q. As shown in the chart, between % and % of the volume of government bonds outstanding will mature in 7, 9 and. No government bonds will reach maturity in 6. Various indicators may be used as quantitative measures of refinancing risk. Government Debt Management looks at maturity profile, short-term refinancing volume and average time to refixing. The individual indicators should not be viewed in isolation. Chart 7. shows developments in refinancing volume over time and shows that short-term refinancing volume has been stable over the past year. Redemptions and coupon payments are well spread out over the coming ten years, and the average time to refixing has been stable in recent years. Credit risk The government s portfolio of interest rate swaps comprised 9 interest rate swaps with a total principal of NOK bn at the end of 6 Q. Interest rate swaps entered into with counterparties with a credit rating of A- or lower accounted for only 7% of the See definitions. Norges Bank / Government Debt Management

6 total principal at the end of 6 Q (Chart 8.). Credit exposure is limited because counterparties must post cash collateral if the market value of interest rate swaps entered into is positive in the government s favour above a certain threshold. The threshold for when collateral must be posted is gradually lowered as the credit rating declines. Collateral is calculated twice a month. At the end of Q, the government s portfolio of interest rate swaps had a total market value of NOK.bn in the government s favour. Posted collateral reduced credit exposure to NOK.8bn. Movements from are shown in Chart 8.. The government has entered into framework agreements with a total of 8 counterparties. At the end of 6 Q, the government had active interest rate swaps with of these counterparties. Entering into interest rate swaps with several counterparties spreads credit exposure. At the end of Q, three counterparties accounted for 8% of total principal. However, credit exposure to these counterparties was only 7% of total credit exposure. Norges Bank / Government Debt Management 6

7 Government debt Debt outstanding at June 6 Ticker code First issue Maturity Coupon Volume outstanding NOK millions Of which government s own stock ISIN Bonds NGB /7 NO 6 NST 7 9 May 6 9 May NGB /9 NO 99 NST 7 May 8 May NGB / NO 7878 NST 7 May May.7 7 NGB / NO 668 NST 7 May May. 8 8 NGB / NO 76 NST 76 Mar Mar. NGB / NO 7 NST 77 Mar Mar NGB /6 NO 779 NST 78 9 Feb 6 9 Feb 6. 8 Total Bills NTB 9/6 NO 777 NST 6 Sep Sep NTB /6 NO 778 NST 6 Dec Dec 6 8 NTB /7 NO 79 NST 6 Mar 6 Mar 7 8 NTB 6/7 NO 7677 NST Jun 6 Jun Total 88 Bonds and bills in total Auctions in Q Volume allotted to the market (NOK millons) Total bid volume (NOK millions) Effective yield (%) Price (%) Bid-to-cover ratio Diff. secondary market ask yield (basis points) Auction date Issue Government bonds 6 Apr 6 NGB / Apr 6 NGB / May 6 NGB / May 6 NGB / June 6 NGB / Total: Average in 6 Q:. Treasury bills Apr 6 NTB / Apr 6 NTB 9/ May 6 NTB / Jun 6 NTB 6/ Jun 6 NTB 6/ Total: Average in 6 Q:.8 The secondary market ask yield at the time of the auction is the yield on Oslo Børs at a.m. Buyback of NGB /7 in Q 6 Buyback volume Highest accepted price Lowest accepted Weighted average yield Auction date Issue (NOK millions) (%) yield (%) (%) 7 Jun 6 NGB / Interest rate swaps entered into in Q Trade no. Counterparty Start Maturity Volume No new interest rate swaps were entered into in 6 Q. Norges Bank / Government Debt Management 7

8 . Market update Chart. Government debt outstanding End of year for 6 and end of quarter for 6 Q. In billions of NOK 6 Treasury bills Government bonds Financial crisis swap arrangement Chart. Market issue volume of government bonds In billions of NOK and number of auctions. Actual volume for 6. Planned volume for Tall NO. Issue size to market Number of auctions Average (6-) Chart. Norwegian synthetic -, - and -year government bond yields -day moving average. Percent. January 6 June 6 6 year year year 6 Chart. The Norwegian government bond yield curve Synthetic government bond yield in percent (right-hand scale). Change in basis points (left-hand scale) Endring /6/6 // Chart. Yield on Norwegian government bonds Percent. January June 6 NGB /7 NGB /9 NGB / NGB / NGB / NGB / NGB /6 Chart.6 Yield spread between Norway and selected countries -year government bond yields. Basis points. January June 6 Germany Sweden UK US - - Jan Feb Mar Apr May Jun - Jan Feb Mar Apr May Jun - Norges Bank / Government Debt Management 8

9 Chart.7 Spread between government bond yield and swap rate Government bond yield minus swap rate. Synthetic bond yield. Basis points. January June 6 - year year year - Chart.8 Asset-swap spread for government bonds Basis points. January June 6 - NGB /7 NGB /9 NGB / NGB / NGB / NGB / NGB / Jan Feb Mar Apr May Jun -6 - Jan Feb Mar Apr May Jun -. Auctions Chart. Bid-to-cover ratio in bond auctions Average and sample space. 6 6 Average - 6 Chart. Bid-to-cover ratio in bill auctions Average and sample space. 6 6 Average Chart. Auction results, government bonds Spread between the yield achieved in government bond auctions and the secondary market ask yield on Oslo Børs at the time of the auction. Averages and sample space. Basis points 8 6 Average - 8 Chart. Auction results, government bonds Spread between the yield achieved in government bond auctions and the interest rate in the interest rate swap market at the time of the auction with the same residual maturity. Volume- and maturity-weighted averages and sample space. Basis points Average Norges Bank / Government Debt Management 9

10 . Turnover Chart. Quarterly turnover of bonds Oslo Børs. By bond. In billions of NOK. Q 6 Q NGB / NGB / NGB /7 NGB /9 NGB / NGB / NGB / NGB / NGB /6 Average (Q - Q ) Chart. Quarterly turnover of Treasury bills Oslo Børs. By bill. In billions of NOK. Q 6 Q 6 7 NTB NTB 9/ NTB /6 NTB 6/6 NTB 9/6 NTB /6 NTB /7 NTB 6/7 Average (Q - Q ) Q Q Q Q Q Q Q Q Q Q Q Q 6 Q 6 Q Q Q Q Q Q Q Q Q Q Q Q 6 Q 6 Chart. Gross turnover by region Government bonds. Reported by the primary dealers. In billions of NOK Chart. Gross turnover by counterparty Government bonds. Reported by the primary dealers. In billions of NOK H H Norway Scandinavia Europe Americas Asia Other Banks/Mortg. comp. Funds incl. hedgefunds 8 8 Interdealer broker Public authorities Pension, insurance 6 Primary dealers Other 6 Chart. Gross turnover by region Treasury bills. Reported by the primary dealers. In billions of NOK Chart.6 Gross turnover by counterparty Treasury bills. Reported by the primary dealers. In billions of NOK H H Norway Scandinavia Europe Americas Asia Other Banks/Mortg. comp. Funds incl. hedgefunds Interdealer broker 6 6 Public authorities Pension, insurance 7 Primary dealers Other Norges Bank / Government Debt Management

11 Chart.7 Repurchase agreements with Norges Bank Government bonds. Average usage of the NOK 8bn facility for each security, in percent. 6 Q and Q % % NGB /7 NGB /9 NGB / NGB / NGB / NGB / NGB /6* % % Chart.8 Repurchase agreements with Norges Bank Treasury bills. Average usage of the NOK 8bn facility for each security, in percent. 6 Q and Q 7% 6% NTB /6 NTB 6/6 NTB 9/6 NTB /6 NTB /7 7% 6% % % % % % % % % % % % % % % % % % % % Jan Feb Mar Apr May Jun % % Jan Feb Mar Apr May Jun % Bonds marked by an asterisk were not available for repurchase at any time in the period. * NGB / was first issued on 9 February (settlement date). NTB /6 matured on 6 March. NTB /7 was first issued on 6 March (settlement date). Norges Bank / Government Debt Management

12 . Ownership composition Chart. Ownership composition for bonds At the beginning of December for. At 7 June 6 % 9 % 8 % 7 % 6 % % % % % % % % % 6 % 8 % % % % % 66 % % % 7 % % % 7 % 7 % % 9 % 6 % 6 % % % % 7 % 6 % 8 % 8 % % 8 % 6 % % 6 % % % 9 % 6* % 9 % 8 % 7 % 6 % % % % % % Foreign sector Banks Life insurance and pension funds Government sector Other % Chart. Ownership composition for Treasury bills At the beginning of December for. At 7 June 6 % 9 % 8 % % 8 % 8 % 6 % % % % 9 % % 6 % 8 % 7 % % 9 % 8 % 7 % % % % 8 % 7 % 7 % % % 6 % 6 % 6 % 9 % % 6 % % % % % 6 % 7 % % % % 9 % % % % 7 % 7 % 7 % % % % % 7 % 9 % % % % 9 % % % 6 Foreign sector Banks Life insur. & pension funds Govt. sector Sec. funds Mortg. comp. Non-life insur. Other Chart. Changes in ownership composition for bonds Billions of NOK. 8 March 7 June 6. Foreign sector Chart. Changes in ownership composition for Treasury bills In billions of NOK. 8 March 7 June 6. Foreign sector. Banks. Banks.7 Life insur., pension -. Life insur., pension.9 Government sector. Government sector -. Sec. funds -.8 Sec. funds.6 Mortg. comp. -.7 Mortg. comp. -.9 Non-life insur. -. Non-life insur. -.8 Other.6 Other. Total -. Total Chart. Ownership composition for bonds by bond Including government s own stock. In billions of NOK. At 7 June NGB NGB NGB NGB NGB NGB NGB /7 /9 / / / / /6 Foreign sector Banks Life insur. and pension funds Govt. sector Sec. funds Mortg. comp. Non-life insur. Other 8 Chart.6 Changes in ownership composition for bonds by bond In billions of NOK. 8 March 7 June NGB /6 NGB / NGB / NGB / NGB / NGB /9 NGB /7 Foreign sector Banks Life insur. and pension funds Govt. sector Sec. funds Mortg. comp. Non-life insur. Other Norges Bank / Government Debt Management

13 . Interest rate swaps Chart. Volume and number of interest rate swaps entered into In billions of NOK. 6 Chart. Principal outstanding at year-end for interest rate swaps In billions of NOK. At June Interest rate risk Chart 6. Average term to maturity Debt portfolio. In years. Quarterly data. Daily data from.. Chart 6. Average time to refixing Debt portfolio. In years. January June Debt Debt incl. IRS.. Jan- Apr- Jul- Oct- Jan-6 Apr-6 Debt Interest rate swaps Debt incl. IRS. Chart 6. Modified duration Debt portfolio. Quarterly data, excl. government s own stock,. Daily data from Debt Debt incl. IRS Chart 6.: Modified duration Government securities. Quarterly data, excl. government s own stock,. Daily data from Debt Bonds Bills The charts do not include planned borrowing. Unless otherwise noted, the government s own stock is included in the charts. The volume of Treasury bills in the swap arrangement (November 8 June ) is not included. Time to maturity of principal. See definitions for more information. Duration with zero yield. See definitions for more information. Norges Bank / Government Debt Management

14 Refinancing risk 6 Chart 7. Maturity profile Government bonds. Notional amount due per year as a percentage of total outstanding volume at June 6 % % Chart 7. Maturity profile Government bonds. Accumulated notional amount as a percentage of total outstanding volume at June 6 % % 9% 9% % % 8% 8% 7% 7% % % 6% 6% % % % % % % % % % % % % % % % % % % Chart 7. Maturity profile Principal and coupon due per year. In billions of NOK. At June 6 Chart 7. Short-term refinancing volume -month rolling window. In billions of NOK. December June 6 Bonds Bills Coupon Bonds Bills Coupon Chart 7. The government s account Average and sample space per month for the period January June 6. Forecast at July of the minimum level per month for the remainder of 6. In billions of NOK Minimum level Forecast of the minimum level Jan- Apr- Jul- Oct- Jan-6 Apr-6 Jul-6 Oct-6 6 The charts do not include planned borrowing. Unless otherwise noted, the government s own stock is included in the charts. The volume of Treasury bills in the swap arrangement (November 8 June ) is not included. Norges Bank / Government Debt Management

15 8. Credit risk interest rate swaps Chart 8. Credit exposure In billions of NOK. January June Chart 8. Principal, credit exposure and market value interest rate swaps Percentage of total volume June 6, by rating % % % % % % % % % % % % - - % % % - Jan- Apr- Jul- Oct- Jan-6 Apr-6 MTM Collateral Exposure - % AA- A+ A A- BBB+ BBB Principal Credit exposure Market value % Chart 8. Rating Number of counterparties at June 6 Chart 8. Principal, interest rate swaps By counterparty, at June 6, RBS % Swedbank % SEB % Barclays % Bank of America % Credit Agricole % Citi % Nordea 6 % Danske Bank % AA- A+ A A- BBB+ BBB Handelsbanken % Goldman Sachs % DNB % Norges Bank / Government Debt Management

16 Mandate On October, the Ministry of Finance laid down a mandate for the management of government debt. Under the mandate, Norges Bank shall issue government debt and enter into financial contracts as part of its management of government debt in the name of the Ministry of Finance. The objective of management is to meet the government s borrowing requirement at the lowest possible cost, taking into account the government s interest rate risk and that there should be a liquid yield curve for government securities with a maturity of up to ten years. Each year, the Ministry shall set an upper limit for gross borrowing and a minimum average time to refixing. Within these limits, Norges Bank shall set an annual borrowing programme broken down into bills and bonds with a calendar for debt issues. The Bank shall lay down principles for measuring and managing counterparty exposure and operational risk. Norges Bank shall regularly submit to the Ministry of Finance analyses of profitability and risk relating to government debt management and assessments of the attainment of objectives. Both the analyses and the assessment shall be published. The mandate entered into force on January. Limits for 6 laid down by the Ministry of Finance Description Limit Actual Mandate Long-term borrowing Short-term borrowing Average time to refixing Government s account Maximum issue volume for new long-term borrowing (government bonds). Volume for maximum short-term market debt outstanding (Treasury bills). Minimum average time to refixing for government debt including interest rate swaps. Minimum level of the government s account at Norges Bank. NOK 7bn NOK bn at June Section - NOK bn >. years NOK bn Maximum volume outstanding was NOK 97 bn June June Section -.8 years at June Section - The level has been higher than the minimum throughout Q. The lowest account balance was NOK. bn on May. Section - () Mandate for the management of government debt Refinancing risk Interest rate swaps Description Limit Actual at March 6 Mandate The borrowing strategy shall be formulated so that no more than % of government bonds < % Fulfilled Section - outstanding will mature each year. The outstanding volume of interest rate swaps shall not exceed the volume of government bonds, including the government s own stock of < % 7.% Section - government bonds. Primary dealers of Norwegian government securities Brokerage firm OSE ID Contact person Telephone Both government bonds and Treasury bills Danske Bank DDB Leif Inge Christensen DNB DNM Olav Gunnes Nordea NDM / NDA Lars Even Klepsland (bonds) Pål Martinsen (bills) Skandinaviska Enskilda Banken SEB Michael Kofoed Norges Bank / Government Debt Management 6

17 Risk The primary objective of management of the debt portfolio is to meet the government s borrowing requirement, while taking into account the risk to which the government is exposed. Interest rate risk Interest rate risk is the risk of loss or gain owing to changes in market yields. The issuance of long-term fixed income securities results in known future nominal interest payments in the period ahead. However, in the event of a fall in the yield, the government will have locked in a higher rate than the prevailing market yield. The government employs a cash-basis budgeting and accounting system and therefore attaches less weight to changes in market values owing to changes in yields. The government uses average time to refixing as a measure of interest rate risk. 7 Over time, interest rate risk will be affected by a number of strategic decisions, including the issuance and buyback strategy. By using interest rate swaps, the portfolio s average time to refixing can be changed independently of the issuance and buyback strategy. Refinancing risk Refinancing risk is the risk that new debt will have to be issued on less favourable terms than existing debt or that it will not be possible to issue new debt when existing debt matures. The latter instance is regarded as highly improbable for the Norwegian government. Refinancing risk is closely related to interest rate risk. Refinancing risk can be limited by spreading the maturity profile of long-term debt along the yield curve to limit the share of total debt maturing at the same time. The mandate issued by the Ministry of Finance states that the borrowing strategy shall be formulated so that no more than % of government bonds outstanding will mature each year. Refinancing risk may be reduced further by meeting the financing requirement in sufficient time, ensuring a broad investor base and having sufficient contingency liquidity. Buybacks of securities smooth the repayment profile and can thereby also be used to reduce refinancing risk. As quantitative measures of refinancing risk, the Section for Government Debt Management has used three indicators: maturity profile, short-term refinancing volume and average time to refixing. The individual indicators should not be seen in isolation. For example, a portfolio consisting of Treasury bills and government bonds may have a relatively high average time to refixing, but at the same time an unacceptably high short-term refinancing risk. Credit risk Credit risk is the risk of losses when a counterparty does not meet its payment obligations. The government enters into interest rate swaps to reduce the average time to refixing in the government s debt portfolio. An interest rate swap with a market value in the government s favour exposes the government to the counterparty s payment capacity. This risk is limited by the use of collateral agreements (standardised ISDA/CSA agreements). There is no credit risk associated with the principal in an interest rate swap. The government only enters into unilateral collateral agreements. This means that the counterparty must post collateral when the interest rate swap has a positive value over a certain threshold. When the interest rate swap has a positive value for the counterparty, the government does not post collateral. On the contract date, counterparties must have a satisfactory credit rating from one of the major credit rating agencies. The threshold value for posting collateral rises with the counterparty s credit rating. The credit exposure to a single counterparty is the total market value in the government s favour of all interest rate swaps with a single counterparty (netting), less the counterparty s posted collateral. The government calculates and exchanges collateral twice a month. In the period between collateral posting dates, counterparty exposure may increase beyond the threshold value. Credit risk therefore dependent on fluctuations in the yield, the residual maturity of the agreements and the counterparty s payment capacity. Liquidity risk The government must have a certain liquidity reserve to enable it to meet its payment obligations at all times. Norges Bank orients government borrowing in the market towards ensuring that at all times the government has a given minimum level in its group account with the central bank. Norges Bank may not extend credit to the government through purchases of government securities in the primary market. Operational risk Operational risk is defined as the risk of economic loss or of loss of reputation as a consequence of failures in internal processes, human error or system failure or of other loss due to external circumstances. Managing operational risk involves uncovering risk factors that may result in losses and estimating the probability and consequences of possible adverse incidents. 7 See definitions. Norges Bank / Government Debt Management 7

18 Definitions Asset-swap spread The difference between the effective yield on a government bond and a bond with the same maturity and coupon equal to the floating money market rate. Average term to maturity The average term to maturity is defined as the time until maturity of the principal of Treasury bills, bonds and the fixed leg of interest rate swaps, while time to refixing is used for the floating leg of interest rate swaps. Notional value/principal is used for weighting. Neither the amount of the coupons, market values or yield level affects the calculation. Average time to refixing The average time to refixing is equal to the duration given an effective yield of zero. This is analogous to the calculation of average term to maturity, but the coupons are included in the calculation. The market value given an effective yield of zero is used for weighting. In other words, all cash flows are weighted by their notional values. Neither the current market value nor yield level affects the calculation. Basis point A basis point is one hundredth of a percentage point (. percentage point). Also known as bips (bps). Bid-to-cover ratio Bid volume divided by allotment volume. Coupon The annual fixed interest rate on a bond. Credit risk Credit risk is the risk of loss if a counterparty fails to meet its payment obligations. Debt portfolio The total amount of debt outstanding. In the case of government debt, the debt portfolio comprises the sum of all debt instruments outstanding (Treasury bills and government bonds) and financial contracts entered into (interest rate swaps). Duration (Macaulay duration) The weighted average time until repayment of a debt instrument calculated on the basis of the present value of future cash flows. Duration is never longer than the time to maturity, and in the case of a debt instrument with coupon payments, it will be shorter. For zero-coupon bonds, duration is equal to the time to maturity. Duration is also a measure of the sensitivity of the price of the instrument to changes in yields. Government bond Debt instrument with an original maturity of over one year, with payment of a fixed coupon each year. Norwegian government bonds are issued in NOK. Borrowing in the form of long-term government debt takes place through the issuance of new bonds and reopenings of existing bonds. Also referred to simply as a bond. Government s own stock The government holds its own stock of government bonds and Treasury bills. These are used in repurchase agreements with primary dealers to ensure that the primary dealers are able to deliver bonds and bills to their customers. IMM dates Commonly used maturity dates for standardised money market products (IMM stands for International Money Market). IMM dates are the third Wednesday of March, June, September and December. Interest rate risk Interest rate risk is the risk of loss or gain owing to changes in market yields. Interest rate swap Agreement between two parties to exchange interest payments associated with an agreed principal for an agreed period. Such agreements make it possible to separate the choice of fixed versus floating rate from the choice of time to maturity. Under the agreement, one party ordinarily receives an interest rate agreed in advance (fixed rate) over the entire term to maturity of the principal, while the other party receives the prevailing market rate (floating rate). Interpolated yield / synthetic yield An estimated yield derived from weighting several observed yields. For example, an interpolated five-year yield may be found by weighting the yields on two known securities, one with a maturity shorter than five years and one with a maturity longer than five years. Liquidity risk Liquidity risk is the risk of being unable to meet financial obligations on the agreed date. Norges Bank / Government Debt Management 8

19 Maturity profile The maturity profile provides a picture of the size of the payment obligations (redemptions and coupon payments) the government faces per calendar year over the coming years, given the debt outstanding at that date. Modified duration (interest rate sensitivity) Calculated on the basis of duration and expresses price sensitivity to changes in yields. The longer the modified duration, the more the portfolio s value will fluctuate owing to changes in yields. Operational risk Operational risk is defined as the risk of economic loss or of loss of reputation as a consequence of failures in internal processes, human error or system failure or of other loss due to external circumstances. Primary dealer Bank/brokerage firm that has entered into an agreement with Norges Bank to quote firm prices for Norwegian government securities on Oslo Børs. Primary dealers have the sole right and obligation to participate in auctions of government securities. Separate primary dealer agreements are entered into for the bond and Treasury bill markets and for one year at a time. Principal The original amount of a claim, i.e. amount without interest and costs. Refinancing risk Refinancing risk is the risk that new debt will have to be issued on less favourable terms than existing debt or that it will not be possible to issue new debt when existing debt matures. Repurchase agreement The sale of a security together with an agreement for the seller to buy back the security at a later date at an agreed price. Also called a repo agreement. Short-term refinancing volume The short-term refinancing volume is the sum of redemptions of existing government bonds and Treasury bills and coupon payments on bonds over the next months. The indicator expresses the size of the payments that the government will face over the coming year. With an assumption of an unchanged nominal size of the debt, the sum of bonds and bills indicates the amount to be refinanced at a new interest rate. If interest rate levels increase by one percentage point, the government s costs in isolation will increase by % of this amount over the next months. Spread The difference between e.g. bid and offer prices or between bid yield and ask yield. Swap Agreement between two parties to exchange future cash flows. For example, one party can pay the other interest at a floating rate, while receiving interest payments at a fixed rate. See also interest rate swap. Swap spread Difference between the yield on a government security and the swap rate with the same maturity or duration. Synthetic yield See interpolated yield. Treasury bill Debt instrument with a maturity of up to one year that is issued as a zero-coupon security. Norwegian Treasury bills are issued in NOK with settlement on IMM dates in March, June, September and December. Bills mature on the IMM dates in the same month the following year. Between IMM dates, existing Treasury bills are reopened. Also referred to simply as a bill. Figures and calculations Prices and yields from Oslo Børs The prices used are the last traded prices if the last traded price is within the spread (at market close). If the last traded price is outside the spread (at market close) the point in the spread is chosen that is nearest the last traded price (best bid or offer price depending on which side of the spread the last traded price was). If there were no trades in the course of the trading day, the mid price (at market close) is used. Synthetic yield The synthetic yield is calculated by weighting two government bonds with residual time to maturity of differing lengths (linear interpolation). If no longer-dated security is available, the yield is calculated by using the two nearest bonds with shorter maturity and continuing the trend out to the desired maturity (extrapolated yield). Norges Bank / Government Debt Management 9