Norges Bank announced a new plan to provide funding to the Norwegian banking sector on Sunday. Under the plan the banks will be able to give covered bonds to Norges Bank in exchange for newly issued gov-ernment bonds. The size of the programme is up to NOK 350bn, and the duration of the exchange pro-gramme will be up to 3 years.
Few details have as yet emerged about the execution of the programme, but Norges Bank is currently consulting with participants in the government bond market. Needless to say this will constitute a mas-sive increase in the supply of Norwegian government bonds. The current stock of government bonds is NOK 254bn.
The government bond market is in complete chaos pending both the specification of the plan and the eventual supply. Bid-offer spreads are 20 – 25 times wider than normal and liquidity is extremely hard to find. The situation has not been helped by one of the bigger players selling government bonds at the end of last week prior to the announcement of the plan.
The plan might help lower funding costs for Norwegian banks, but its impact on NIBOR is less clear. Re-cent moves in NIBOR have more been a function of LIBOR setting lower in USD and the market pricing in more rate cuts from Norges Bank.
