Estonia says retail bond repayment poses no budget problems

Estonia’s Finance Ministry says the repayment of a 200 million-euro government bond loan will not create problems for the state budget, ERR reported. The two-year bonds, which carried a 3.3 percent yield, mature on Wednesday, allowing investors to receive their money back.

The bonds were the only government bond issue so far aimed directly at retail investors. The state does not plan to issue a similar bond in the near future.

“In terms of cash flow, we are refinancing these with other instruments,” said Janno Luurmees, head of the Finance Ministry’s Treasury Department. He said the state issued 1 billion euros in 10-year bonds in the spring and could conduct further transactions if cash flow requires it. All such transactions have already been taken into account in the state budget, he added.

Instead of another direct retail issue, the ministry expects investors who bought the 2024 bonds to purchase new government bonds on the stock exchange. Future bonds are also likely to be listed on the Tallinn Stock Exchange, allowing all investors to buy them through the exchange, Luurmees said.

A 10-year government bond issued this spring, carrying a 3.5 percent interest rate, is currently freely traded on the exchange. Its market price is below the issue price and could fall further if Euribor rates rise.

Investor Lev Dolgatšov said bond prices with lower coupons tend to fall when interest rates rise. An investor buying the bonds at 95 percent of their face value and selling them before maturity could potentially have to sell them at 90 percent, he said.

Allan Marnot, head of Swedbank’s capital markets division, said government bonds are currently not trading very actively on the secondary market. The 10-year maturity may be too long for small investors, while liquidity and the possibility of immediate redemption may also be concerns, he said.

Tallinn Stock Exchange chief Kaarel Ots said the listing of 1 billion euros’ worth of 10-year government bonds had boosted activity across the exchange. He said it was the first time a 1 billion-euro issue had been carried out under local law using only local infrastructure, adding that it could open the way for future issues.