Popular Norwegian bonds

illustration: norwegian krone

(03.08.2011) Norwegian government bond yields have fallen sharply over the past week. Debt turmoil and disappointing macro figures have increased demand for the safe Norwegian alternative. For the same reason, the krone has appreciated and traded outside its established trading range for the first time since January.

By Maren Romstad, Analyst at DNB Markets

There were few important key figures yesterday and in Norway the only macro number of importance was the PMI index. In recent months the index has been more or less stable at relative high levels indicating production growth. This separates the Norwegian index from corresponding international indices. For almost all other countries, similar indices have been on a downward trend lately and are now around the neutral level, indicating zero growth in production. The fact that global growth has been showing signs of abating, at the same time as debt problems still are present, are probably important reasons for the attractiveness for both Norwegian and Swedish government bonds.  

Both Norwegian and Swedish government bond yields have fallen significantly in recent weeks, which imply higher demand for government securities. Norway and Sweden have a very different fiscal position than most other industrialized countries and may be viewed a safe place to be.

In Europe one fears that the second rescue package for Greece is not sufficient and that the most serious problems may spread to larger and more important countries such as Spain and Italy. In the US the parties have finally agreed on raising the debt ceiling and cut public spending. This prevents an US default, but is not necessarily sufficient to prevent a downgrade of US government debt. In addition, the debate may flare up again.

Increased fear normally leads to investors seeking safety in government bonds, which puts a downward pressure on government bond yields and drives the swap-spread out. With the low government bond yields, the difference between Norwegian swap and government bond yields are now at record levels. The difference between ten-year interest rates is at a whopping 130 basis points, almost one percentage point higher than the average for the last ten years. We have to go back to the fall of 2008 to find a difference as large. Yesterday the 10-year rate (NST474) fell 20 basis points to 2.63.
High demand for Norwegian and Swedish government bonds has probably also been a contributing factor to the two currencies strengthening against the euro in recent days. From a historical perspective we find no relationship between the purchases of government securities and the Norwegian krone, but that does not mean it’s always the case. The Norwegian krone has in recent days broken out of the established trading range against the euro. Since January EURNOK has traded between 7.70 and 7.95, but now NOK has strengthened beyond this.

In light of the traditional drivers for the Norwegian currency this seems somewhat surprising. Stocks and the demand for more risky assets have fallen in the past week, which historically have meant a weakening krone. Furthermore, oil prices have declined, also a negative driver for NOK. Hence, our main view is that the recent strengthening is temporary.
Over the past days the US dollar has strengthened versus the euro, which also can explain the stronger Norwegian krone. The final agreement on the debt ceiling could have benefitted the greenback, but at the same time the European currency is on a downward trend. The weaker euro is due to increased fears that larger and more important euro zone countries, such as Italy and Spain, are forced to finance themselves at constantly increasing rates. Yesterday Spanish and Italian benchmark bond yield spreads versus Bunds spiked to a fresh euro area high. Fears about global growth, debt turmoil and anxiety for another US recession are increasing demand for safe havens. In the FX market, USD, CHF and JPY are strengthening. Furthermore, stocks are tumbling, US Treasury and Bund yields are falling and commodities are decreasing.