The Dutch State’s funding policy sets out guidelines and conditions for financing the state debt. Relevant questions concern the size of the total borrowing requirement in a given year, the call on the money market and capital market, the use of funding instruments (maturities, volumes, timing, etc.), and the communication with the market.
The guiding principles of the DSTA are consistency, transparency, and liquidity. In addition, the DSTA ensures to maintain sufficient flexibility to deal with changes in market conditions and the funding need.
Consistency, transparency, and liquidity
The principles consistency and transparency strengthen the Dutch State’s reputation of a reliable and predictable issuer and thereby contribute to lower funding costs. The DSTA informs investors on funding and other new developments through press releases and various publications on a regular basis. Every year, the annual Outlook is published in December. The annual Outlook contains the funding plan for the upcoming year. The Quarterly Outlook focuses on the issuance calendar for the quarter ahead. Auctions and their results are announced on the DSTA website, Bloomberg, and twitter.
The DSTA also attaches great importance to liquidity. It sees to it that there is a high level of liquidity in the issued instruments, so that these instruments are easily tradable and therefore as attractive as possible for national and international investors.
Whilst adhering to the aforementioned principles of consistency, transparency and liquidity, the DSTA also applies flexibility where possible in order to deal appropriately with new market conditions or a changing funding need. This implies that in practice the DSTA aims to find a balance between being predictable and reliable and at the same time having sufficient leeway to react to new developments.
How is the total borrowing requirement determined?
The total borrowing requirement (or funding need) in a given year is determined by: (1) the redemptions on the capital market, (2) the end-of-year outstanding money market volume of the previous year and (3) the (estimated) cash balance in the budget. The funding need can change during the course of the year, for example, by new estimates of the cash balance. In addition, buy-backs of DSLs by the DSTA or fluctuations in the amount of cash collateral as a result of interest rate changes can influence the funding need. The estimated borrowing requirement will be updated throughout the year.
The total borrowing requirement determines the State’s total call on the international financial markets. The total call is split between the capital market (the market for financing with maturities longer than a year) and the money market (the market for financing with maturities up to a year). The DSTA strives to maintain a good balance between the two.
In order to be consistent, the DSTA aims not to deviate from the announced issuance volumes on the capital market. To have some flexibility, the DSTA announces a target range, instead of a single point estimate, for its capital market issuances. In principle, however, windfalls and setbacks in the budget are absorbed on the money market, which serves as a buffer for (un)expected changes in the borrowing requirement. To maintain this buffer function the DSTA strives to keep the money market at an adequate volume at all times.
The corona crisis was one exception where the DSTA did deviate from the funding plan announced at the start of the year. Although a large part of the funding need was absorbed by increasing the call on the money market (which naturally serves as a buffer), it was clear that additional issuance volumes also had to be reached on the capital market. To nevertheless maintain as much consistency as possible, the DSTA decided to issue all bonds as planned on the capital market but to revise volumes upwards and also issue a new bond. The revised funding plan was communicated to the market through an extensive press release.
Which financial instruments are used by the DSTA?
The DSTA uses a number of funding instruments, including:
- Treasury bonds (Dutch State Loans; DSLs); these are standardised loans with a maturity greater than a year issued on the capital market;
- Treasury bills (Dutch Treasury Certificates; DTCs); these are standardised loans with a maturity less than a year issued on the money market;
- Global Commercial Paper (GCP); short-term paper issued on an ad-hoc and flexible basis on the money market; GCP is issued both in euros and foreign currencies (exchange rate risks are fully hedged) and can be in the form of Euro CP or US CP.
- Deposits; a short-term cash transfer on the money market used either for borrowing or lending;
- Repos; this is another instrument generally used for short-term and flexible funding on the money market; repos are collateralised loans with a repurchase agreement (either in the form of sell-buy-backs or buy-sell-backs); the DSTA also has a repo facility available for primary dealers that are short a particular DSL or DTC;
- Green bonds; these are conventional DSLs issued on the capital market with the addition that the proceeds are directed towards green expenditures and reported on.
- US dollar bonds; these are DSLs issued in US dollars on the capital market (exchange rate risk is fully hedged); this instrument is only used when a funding advantage can be realised and given that it fits within the funding need.
What are the maturities used by the DSTA?
The maturity of bonds issued by the DSTA on the capital market ranges from 3 to 30 years. By issuing bonds in different maturities the DSTA is able to attract a broad range of investors. Depending on the borrowing requirement, the DSTA aims to issue one to three new bonds annually. Every year this generally includes a new10-year bond, so as to maintain a liquid yield curve up to the 10 year segment. In addition, the DSTA can issue shorter-dated or longer-dated bonds – either new or through reopening older bonds – depending on investor demand and liquidity conditions. The DSTA strives to issue a new 30-year bond every four to five years.
In order to foster liquidity the DSTA is committed to raise the outstanding amount of new DSLs with a maturity up to 10 years to at least € 12 billion within the first twelve months of issuance. 30-year DSLs will be brought to a minimum outstanding volume of at least € 10 billion within a few years of issuance. After the initial issuance, bonds are regularly reopened in order to achieve the target volume. The liquidity of bonds is further enhanced through active market making by Primary Dealers (that includes quotation obligations) as well as a repo facility that Primary Dealers can make use of in case they are short an instrument.
When are auctions held?
The DSTA has reserved the 2nd and 4th Tuesday of the month for DSL-auctions, although all dates have to be used up. Actual auctions to be held depend on the funding need and will be announced through press releases and quarterly issuance calendars. DTCs tend to be auctioned regularly on the 1st and 3rd Monday of the month. Depending on the type of issue – DTC, DSL or DSL reopening – the DSTA makes use of various auction methods. More information on that topic can be found here: Auction Methods.