Sweden may increase inflation-linked bonds as a proportion of outstanding government debt from 15% to 20-25% over the coming years and could start issuing in maturities under five years, according to Thomas Olofsson, head of funding at the Swedish National Debt Office in Stockholm. The Debt Office has made both recommendations to the Swedish Ministry of Finance, which is due to decide on both matters by the end of November.
Sweden had about SEK1,242 billion ($175 billion) of debt outstanding as of October 2004, and SEK183 billion ($26 billion) of linkers. The Debt Office has issued about SEK15 billion ($2 billion) of linkers year-to-date, and is currently restricted to issuing in maturities over five years.
The aim is to increase liquidity in inflation-linked issuance to the point where the illiquidity premium investors have demanded from time to time is eliminated, Olofsson said. This will allow the state to capture the premium investors are typically willing to pay for protection against inflation risk. Oloffson also highlighted the portfolio diversification advantages of adding more linkers.
As to the timing of the increased issuance, he said it would depend on investor appetite. "We don't have full control over the size of annual issuance, since the linker market is not yet deep enough to increase issuance without dramatically affecting price if the demand isn't there," said Olofsson, contrasting the Swedish linker market with the market in foreign currency which is so deep it's easy to increase or decrease issuance quickly. He pointed to the success of short-dated linkers in large markets such as Italy as the rationale behind offering them in Sweden as well.