The Debt Office will set the bid yield at 1.70 per cent at today's exchange auction of 3101 for 3106. This is a deviation from the normal procedure of using indicative market yields.
As previously announced, The Debt Office will carry out an exchange auction of loan 3101 for loan 3106 on 14th November 2007. The pricing is normally based on indicative market yields. However, this presupposes, as we stated in Central Government Borrowing - forecast and analysis 2006:3, that the market yields reflect relevant information and market participants expectations.
At the upcoming exchange we will make a deviation from our normal procedure. At the buy-back of loan 3101 we will not base the bid yield on indicative rates. The reason is that we assess that this loan is not reasonably priced relative nominal yields. The difference between nominal and real yields should e.g. reflect expectations of the future inflation rate. However, at present the difference between the nominal and real yields in the relevant maturities are substantially larger than the inflation forecasts published by the markets participants. A buy-back at current market yields would, according to market participants' forecast, imply losses for the state.
The current and upcoming exchanges next year of loan 3101 for longer inflation-linked loans are not carried out to satisfy the governments financing needs. For investors that wish to keep their inflation-linked exposure, the exchanges offer the opportunity to prolong the time to maturity in their portfolios instead of having to reinvest in the market when the bonds fall due. Therefore, the Debt Office do not offer any economic incentives for investors to participate in the exchange. We have previously stressed this in the Central Government Borrowing - forecast and analysis, both in 2006:2 and 2006:3.
The current exchange will be carried out at the bid yield of 1.70 per cent in loan 3101. At present our assessment is that the selling of loan 3106 at the exchange could be carried out in line with the indicative market yields.
Investors that have bought loan 3101 at a low real yield and project that future inflation will be higher than the markets average forecast and therefore abstain from participating in the exchange, have the option of keeping the bond until maturity and profit on the inflation compensation that we will paid out at maturity.
During the spring the Debt Office will offer more exchanges of loan 3101 for longer inflation-linked loans. We hope that market conditions then better will reflect current inflation expectations.
For more information please contact:
Thomas Olofsson, Head of Funding: +46 8 - 613 47 82
Gunnar Forsling, Head of Analysis: +46 8 - 613 45 35