The Danish Mortgage Market: New issuance of callable bonds surprises in February
The first six weeks of 2021 have resulted in a weakening of the relative pricing of the 30 years callable bonds, and they are now priced 10 bp. cheaper compared with a similar government bond.
There have been a lot of new issuances of callable bonds in January as expected, but it has surprisingly continued in February. The main reason for this is that the 1% 2053 series reopened for issuance - bonds must be priced below 100,00 to be open for issuance. Getting a loan just below a price of 100,00 is very popular with Danish homeowners and therefore the issuance of new bonds spiked with several hundreds of millions DKK a day. These close to 2.5 billion worth of long duration bonds is probably the main reason for the relative weakening of the prices.
Among these many new bonds, investors find several attractive bonds at the moment - the expected horizon return is well above 1%, which is hard to find in ‘AAA’ bonds in the EUR bond universe.
The increased issuance of new bonds has resulted in an increased total duration in the Danish Bond Market of 0,7 years - this can be compared to selling an extra 65 billion DKK 10-year Danish Government Bond in the bond market in the first six weeks of the year. That is a lot of additional risk offered to the investors and this is the highest level we have seen since April last year.
We expect this vast issuance to shrink in the coming weeks which most likely will take some of the pressure off the market. This will most likely be the case unless we get increasing interest rates from here on. That would take a breach of the interval -0,40 to -0,60 on the 10-year German government bond, which is not expected in the market, where the ECB will support the low interest rate using the bond buying programs.