Investors showing interest
Investors showed considerable interest in GDM's last Treasury bond auction at the beginning of the month. The series that were being auctioned were the inflation-linked RIKS21 series and the longest series of nominal Treasury bonds, RIKB25, and the Treasury collected well over ISK 8 bn. to finance the deficit in the coming quarters. In the former series, bids were received for a nominal value of ISK 4.6 bn. and bids were accepted for a nominal value of ISK 4.1 bn., whereas in the latter series total bids amounted to a nominal value of ISK 4.6 bn. and accepted bids to a nominal value of ISK 3.7 bn. The yield on RIKB25 bonds was 6.18%, whereas the RIKS bonds were sold at yields of 3.55%.

Investors were clearly more interested in the inflation-linked bonds series in this auction than they had been in the auction conducted two weeks earlier. We believe that it is likely that the increase in yields on inflation-linked bonds that has occurred in the meantime - and which exceed the 3.5% floor set by the actuarial settlement provisions of pension funds - has played a major role in whetting investors' appetites. The size of the series is currently ISK 22 bn. in nominal value, but the plan is to increase this to ISK 50 bn. before the end of the year.

Investors showed interest in the RIKB19 series at the auction that was held at the beginning of May and the bids received amounted to ISK 15.7 bn. A decision was made to accept bids for a value ISK 11.1 bn. at a yield of 6.61%, which was the lowest yield since the series was launched. At the opening of markets today, the yield was at 5.98%, which is considerably lower than the  yield that resulted from the previous auction of this series. It will be interesting to see tomorrow whether investors show as much interest in this series as they did last time or whether the yield is now too low to entice big institutional investors. Tomorrow will also reveal whether investors still see buying opportunities in the RIKS21 series, since the yield has been declining since the last auction of this series and was at 3.48% at the opening of markets today.


IMF: Third review under preparation

Final phase in the restructuring of debt
Even though the spotlight has been on Icesave, one should not forget that there are other issues that are important in the third review. According to the last interim report, the Icelandic government must have completed the restructuring and refinancing of savings banks in order for the review to proceed. Moreover, the Housing Financing Fund (HFF) and other financial institutions that are not involved in conventional banking activities must have submitted business plans to the Icelandic Financial Supervisory Authority (FME) that guarantee specified capital positions and required liquidity positions for the next three years. Finally, before the third review can proceed, an overall framework has to be in place for the restructuring of household and corporate debt. At a press conference held at the end of June by the head of the IMF mission to Iceland, Mark Flanagan, he stated, among other things, that the fund welcomed the results that have been achieved in the reorganisation of household and corporate debt and that it is important now to ensure that the framework that is being set up is strong and effective. The key focus in this regard is to be on the new Debtors' Ombudsman office. It also transpired from the press conference that, given the government's blanket deposit guarantee, the IMF did not consider that Iceland's financial stability to be threatened by the recent ruling of the Supreme Court on loans indexed to foreign exchange rates. However, the fund does consider that the ruling could have a considerable impact on public finances and the pace of capital control liberalization. Because of this and the uncertainty that has been generated by the ruling of the Supreme Court, the third review will have to wait until September.