Danish Mortgage Bonds - Strong Demand Ahead

06.05.2019

Recent months has been heavily affected by a declining yield level - most pronounced in March with the yield on 10-year government bonds at some point at 0%. The declining level is due to a general concern about slower growth and inflation. The ECB has recently delayed the timing of the first interest-rate hike until the beginning of 2020 - in the US there is also no longer prospects of interest-rate hikes this year.

Due to the declining yield level, 30-year mortgage credit bonds with a coupon of 2% closed for issues in January, as it traded above par. As an result of additional yield declines in March, the successor with 1.5% coupon was trading above 100 and was also closed for a short period of time.

One of the reasons behind the positive trend of mortgage bonds was the restructuring of the financing of subsidized social housing by the Danish Ministry of Transport, Construction and Housing. Mortgage credit institutions have now initiated a buy-up of 1.5% bonds expiring in 2047 in order to redeem the underlying loans. Investors in these bonds have therefore demanded other long-term mortgage bonds.

We anticipate a continued strong interest in callable bonds – not least from foreign investors, although domestic investors have shown a really healthy appetite for the callable bonds as well. Therefore, the 30 years mortgage bonds have had a very strong performance throughout the year, even though the supply have been much higher than normally.

In May there will be sold approximately 80 billion DKK worth of floating rate mortgage bonds. These bonds are expected to be sold without any repricing of the segment due to the vast excess liquidity experienced in the market this year.

We expect this to continue at least until the first week of July, when drawings and coupons of more than 100 billion DKK will be reinvested in Danish mortgage bonds.