No let-up in demand for long Treasury notes
According to the GDM news release, a total of 61 valid offers with a total nominal value of over ISK 17 bn were submitted for RIKB25. Bids were accepted for ISK 6.7 bn at a yield of 7.73%. Pension funds, investment/UCITS funds, and other domestic institutional investors have been big purchasers of RIKB25 in recent auctions and can be expected to have been prominent in this auction as well.

This brisk demand for long Treasury notes must be viewed as a very positive sign for the Treasury, given its intention to lengthen its maturity profile. We consider the auction results positive for the bond market as well. With this auction, RIKB25 has expanded from just under ISK 64 bn to about 70 bn. At the time the project was kick-started several months ago, many thought it would be extremely difficult to build up a long-term nominal yield curve in the Icelandic bond market, but investor interest in long non-indexed Treasuries has shown that scepticism to have been misplaced. Actually, it is necessary to develop such a yield curve in order to offer Icelandic businesses and households long-term non-indexed loans, including mortgages, at fixed rates.

In RIKB11, 21valid bids were submitted, with a total nominal value of ISK 7.1 bn. Bids were accepted for ISK 3.75 bn at a yield of 7.34%. The series is largely owned by non-residents; for example, foreign investors owned nearly two-thirds of it at end-November. We consider it likely that residents were more interested in RIKB11 this time and that non-residents have adhered to a policy of investing in Iceland for as short a term as possible. As a result, their share in the series probably declined after Friday's auction. Foreign investors may show more interest in the series as the summer approaches, however, and the residual maturity drops below the one-year threshold that many of them seem to have targeted.

Pension funds
Tomorrow the Central Bank will publish its figures on the position of the pension funds at end-December 2009. At the end of November, the pension funds' net assets for payment of pension benefits totalled ISK 1,763 bn, after having increased by 18.8 bn during the month. Of that amount, domestic securities holdings rose by ISK 21.5 bn, and foreign holdings by ISK 3.1 bn. Of individual asset items, the greatest difference was due to the ISK 10.3 bn increase in the pension funds' holdings in Housing Financing Fund (HFF) bonds, reflecting the rise in the CPI during the autumn; the decline in indexed bond yields in November; and possibly purchases of HFF bonds as well. The pension funds' net holdings are slowly and steadily climbing back to pre-crisis levels, but their ultimate value is subject to some uncertainty.

Rising unemployment in the offing
On Wednesday, the Directorate of Labour will publish its January unemployment figures, which will probably show a month-on-month increase due to seasonal fluctuations and general economic conditions. In December 2009, registered unemployment was 8.2%, up 0.2 percentage points from the previous month. A total of 113 people lost their jobs in mass layoffs last month. The Directorate of Labour projected about a month ago that unemployment would range between 8.6% and 9.1% for the month of January.

Downturn in private consumption loses pace
Two statistics that provide insight into consumption patterns will be published this week. On Wednesday, the Icelandic Centre for Retail Studies (RSV) will release its retail index for January, and on Thursday, the Central Bank will publish figures on payment card turnover. Both of these numbers indicate that private consumption is approaching a sort of equilibrium after an abrupt contraction. In December 2009, total credit card turnover amounted to ISK 23.4 bn, an increase in real terms of just over 6% year-on-year. On the other hand, debit card turnover shrank by nearly 4% in real terms during the period, thereby offsetting the rise in credit card use. Total payment card turnover therefore remained virtually unchanged in real terms. This change is in line with recent developments in card use, indicating that Icelandic households are reducing consumption more slowly than before.

Central Bank foreign exchange reserves expanded
On Thursday, the Central Bank will publish a summary of its external position, together with a detailed itemisation of its foreign exchange reserves as of end-January. At the end of December, the foreign exchange reserves stood at ISK 490 bn, having increased by 87 bn during the month. The increase was due in large part to the disbursement of the first tranche of the loan facility from the Nordic countries, which was paid out in accordance with the IMF-led economic programme. The reserves have been expanded much more slowly than originally planned, primarily due to the ongoing Icesave dispute. Still undrawn are credit lines in the amount of EUR 2.3 bn from the Nordic countries, the IMF, and Poland, as this assistance depends on a resolution of the Icesave matter. Expanding the reserves is preparatory to the removal of the capital account restrictions that have been in place since the banks fell in October 2008.