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Derivatives

Netherlands May Double Swaps Use

The Netherlands could double its use of interest-rate swaps this year as part of its efforts to trim the average duration of its debt. The country may enter up to EUR6 billion (USD5.38 billion) in swaps in which it receives fixed in the long end. On the swaps it will receive 10-year fixed-rate and pay a six-month Euribor-based rate, according to Erik Wilders, head of the dealing room at the Dutch State Treasury Agency in Amsterdam. He said the sovereign executed EUR3 billion in similar positions last year and plans to increase its usage this year to lower the average duration of the country's outstanding debt to 3.9 years from four years. Last year was the first in which the Netherlands used swaps to manage its debt profile. The country has EUR176 billion in outstanding debt.

Wilders explained the effort is part of the debt agency's overall risk-management strategy, which it is currently reviewing through an internal risk management audit which he declined to discuss. "First we tried to shorten duration by issuing in [shorter] maturities, but we needed an instrument to separately be able to steer duration of the portfolio and still be able to issue large benchmark bonds, especially in the 10-year sector," he said, to satisfy investor demand. The debt agency expects to issue as much as EUR19 billion this year and its use of swaps will vary depending on how much it issues in longer-paper. For example, Wilders noted the use of swaps will increase if the sovereign finds demand for its 10-year paper. The debt agency will only select counterparties from among its 13 primary dealers, which include Dutch names, such as ABN AMRO and ING Barings, as well as bulge-bracket firms, such as Morgan Stanley and Deutsche Bank.

The Netherlands is the latest European Union sovereign to ramp up its use of swaps to alter its maturity profile. Spain and France also plan to execute similar positions this year (DW, 11/13). Spain plans to receive up to EUR12 billion and France has plans to enter EUR200 billion over the next four years.

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