Non-resident investors indifferent?
There was less interest in the other series in the auction, RIKB11. Bids submitted totalled only ISK 4.3 bn, and all were rejected. This is the second consecutive auction in which RIKB11 was not sold due to paltry demand. We believe this lukewarm response indicates that foreign investors were not interested in participating at present. Non-residents appear much more interested in Treasury bills than in short T-notes at the moment. We believe as well that this played a role in the changed emphases in Treasury bond issuance for 2010, which include increasing Treasury bill issuance rather than reducing it, as was assumed last year. It could prove difficult to build this series up in the near future, but presumably it will become easier as the year passes and the bonds near maturity.

Non-indexed long-term interest has come to stay
Even though RIKB11 did not sell this time, we think the Treasury can be satisfied with the results of Friday's auction. After the auction, some ISK 64 bn are outstanding in RIKB25, in addition to securities loans; therefore, it is comparable in size to most of the other Treasury note series despite having been first issued about six months ago.

It can be said that the Treasury was rather bold to embark on the build-up of such a long nominal bond series in the uncertain environment that prevailed last summer and has been looming ever since. Demand for the bonds appears to be significant, particularly among Icelandic long-term investors. We believe, for example, that the series accounts for nearly 1.5% of the pension funds' portfolios, which can be considered a laudable result for the Treasury, given that many analysts considered it virtually impossible to build up a long-term nominal yield curve in the Icelandic bond market. Actually, the development of such a yield curve is necessary if it is to be possible to offer Icelandic businesses and households fixed-rate, non-indexed, long-term loans, including mortgage loans.

Interest rate decision and interesting statistics due this week

Inflation and the Consumer Sentiment Index
Statistics Iceland is scheduled to publish the January consumer price index (CPI) tomorrow. We predict a month-on-month rise of 0.9%, which would push inflation up from 7.5% to 7.9%. While the expected rise is driven primarily by tax hikes, there will be the usual January tug-of-war between annual price list increases and the downward effect of post-holiday sales. House prices are also likely to drop somewhat for the month.

Also appearing tomorrow is the Capacent Gallup Consumer Sentiment Index for January. In December the index fell for the second month in a row, to 34 points, indicating increased pessimism about the economic and labour outlook among Icelandic consumers, who, unsurprisingly, have been far from upbeat about the economy and the labour market at the end of an extremely difficult year.

We expect unchanged CBI interest rates
We expect the Central Bank (CBI) to keep interest rates unchanged when the MPC announces its rate decision on Wednesday. In its last policy statement, the MPC stated that, if the króna holds stable or appreciates, and if inflation subsides in line with forecasts, preconditions for further monetary policy easing should remain in place. On the last decision date, the euro was trading at just under 183, and it now stands at 180. Inflation measured 8.6% at that time and dropped to 7.5% in December, in line with forecasts. If our forecast of a 0.9% increase in the CPI in January should materialise, inflation will rise to 7.9%, which is nonetheless lower than on the last decision date. Thus it appears that two of the MPC's conditions for further monetary easing have developed since the Committee's last decision date.

But there are other factors that must be considered as well. The president's decision to put the Icesave legislation to a referendum has created uncertainty about both the progress of the IMF programme for Iceland and the emergency funding from the Nordic countries. Risk premia on Icelandic financial assets have risen sharply since then, and the sovereign has been downgraded. The Second Review of the IMF programme was to take place by end-January but will probably be postponed until after the Icesave referendum on 6 March. We believe the uncertainty following the president's veto will prompt the CBI to hold interest rates unchanged at present, even though developments in inflation and the exchange rate could be deemed to justify further monetary relaxation. We do not rule out the possibility of a marginal rate cut, however, particularly in view of Governor Már Gudmundsson's recent statement that a delay in the Icesave affair need not prevent the MPC from lowering interest rates.

External trade in 2009
On Friday, Statice will publish figures on corporate bankruptcies in December 2009 and external trade from January to December 2009. Preliminary figures for December indicate a trade surplus of ISK 7 bn for the month. According to these numbers, the surplus for the year as a whole will probably be in around ISK 73 bn, a dramatic turnaround from the ISK 7 bn deficit in 2008. The difference is due primarily to a one-third decline in import volumes year-on-year. If these figures prove correct, the trade surplus for 2009 totalled some 5% of GDP for the year.