Nordic mortgage bonds have been tipped as a major growth area for some time. Denmark and Sweden in particular have long-established, stable markets that have been steadily attracting interest from outside over the past few years. Swedish mortgage bonds are not strictly covered, since the collateral loans remain on the issuer’s balance sheet. Many covered bond participants see them as still primarily a domestic play with sporadic foreign interest at best. But bankers in the Nordic markets say the paper is attracting more and more demand from non-traditional buyers. The Danish market’s long end is made up of callable bonds similar to the most liquid part of the US MBS market. It has long attracted considerable interest from US accounts, which find the callable structure comfortably familiar. In 1997 and 1998, these accounts started taking big tickets in long-dated Danish paper. Many of them were hurt badly by the Danish mortgage crisis. US accounts retain a large share of the market and trade actively, but are no longer net buyers. The high option-adjusted premia that originally attracted them have now fallen slightly.
Refinancing frenzy
More interesting for European investors at the moment are short-dated non-callable Danish mortgage bonds. A steep yield curve drove big issuance volumes last year – in 2001 Dkr182 billion ($24 billion) of non-callables were launched, more than half with one-year tenors. These are refinanced once a year, in December.
So the whole of a market worth about Dkr100 billion needs to refinance itself within about a fortnight. “You get huge volumes coming into the market in a very short time,” says Peter Höltermand, global head of fixed income and swaps at SEB. “Prior to and during the auction, you can pick up extremely cheap Aaa bonds. Of course you need to look at currency risk. But the Danish krone has been linked to the euro for 10 years, and volatility between the two is close to non-existent. In fact you’re being very well compensated for holding a quasi-euro asset rather than a true euro one.” Denmark is certainly now looking a far likelier candidate for eurozone entry. But the bonds’ potential as a convergence play is limited from now on, as the market has already priced most of this in. Danish government bonds only trade about 32 basis points over Bunds of the same duration, whereas eurozone sovereigns such as Italy and Belgium trade at 26bp or 16bp over. The convergence potential is only about 15bp at the most. But the chance to buy AAA paper, with higher credit quality than most Pfandbrief issuers, alongside a yield pick-up of around 10bp, could be incentive enough. Leading issuers in the Danish market include Realkredit Danmark, Totalkredit and Nykredit.
SEB’s Höltermand says investors are easily attracted. “The credit story is moving in the opposite direction to the rest of the world. Many of these issuers have only recently become AAA, at the same time as the Pfandbrief market’s credit has suffered. Lots of liquidity has been withdrawn from Pfandbriefe, as dealers stopped quoting. More and more investors are turning to Danish bonds as a liquid, high-quality alternative.
