Dutch government moots future issuance of inflation-linked bonds
NETHERLANDS - Dutch finance minister Jan Kees de Jager has suggested the country's Treasury would consider issuing long-duration inflation-linked bonds (ILBs) if long-term interest rates began to rise.
In a letter to the senate, however, he dismissed any further exploration of the issue for now, given the currently low interest rates and negative real rates, and said that most pension funds shared his views on the matter.
De Jager had been responding to a question from Frank de Grave, senator for the liberal party VVD, who asked whether pension funds were prepared to pay an "adequate premium" for inflation risk.
The minister said any future survey would focus on 30-year index loans, as 10-year ILBs would be of no benefit to government debt financing.
He said consultations with the pensions sector showed that the Dutch state would need real returns of 0.3-0.4%, while pension funds would require an additional premium due to ILBs' limited liquidity.
However, De Jager argued that new pension contracts focusing on real pensions would increase demand for ILBs and decrease demand for nominal loans, while acknowledging that the conditional character of the real pension target could also drive down demand for index loans.
De Jager also said indexation based on a Dutch consumer index would increase both the risk premium for nominal loans and the liquidity premium for index loans.
By contrast, a link to a European consumer index would decrease both premiums, he said.
The minister stressed that the scale of Dutch ILBs must remain limited and not exceed €30bn a year.