Frances Schwartzkopff| Bloomberg| 27 November 2016
Donald Trump may have frightened off global bond investors, but the world’s largest mortgage-backed covered-bond market is shrugging off the specter of a real estate mogul with big spending plans running the U.S.
Short-term yields in Denmark’s $430 billion mortgage bond market fell close to (and in some cases touched) record lows in quarterly refinancing auctions that ended last week. That means investors will continue to pay some households to borrow, excluding fees.
Christian Heinig, chief economist at the mortgage unit of Danske Bank, says monetary policy is still more important for bond investors than whatever Trump might do in the White House.
“In the short end, it’s the central banks that have more of an effect on the curve, and that’s what we’re seeing,” Heinig said. “We don’t see the ECB raising rates in 2017,” and assuming no extraordinary events, “there’s no outlook for a Danish rate rise either.”
The Danish central bank’s key rate, now at minus 0.65 percent, has been below zero for most of the past 4 1/2 years to defend the nation’s currency peg. It’s an extraordinary situation that Denmark’s covered bond market has made the most of, thanks to its highly efficient model for feeding monetary policy into the economy.
Borrowers, 60 percent of whom have adjustable-rate mortgages, sell bonds directly into the market, brokered by mortgage lenders that charge administrative fees to keep the loans on their books and funnel payments to investors.
Danes continue to enjoy Europe’s lowest borrowing costs, driven in part by demand from foreign investors. They hold almost 22 percent of the market’s bonds, according to the Danish Mortgage Banks’ Federation.
Households pay 0.6 percent less than their European counterparts, on average, to borrow for five years, the Association of Danish Mortgage Banks says. That’s even after banks imposed higher fees on short-term bonds to offset refinancing risks.
At Jyske Bank, the one-year rate fell to zero, based on auctions that Denmark’s second-largest listed lender held last week. That’s down from 0.15 percent a year ago.
“Rates on mortgage loans are tied to the low rates on the mortgage bonds,” says Ane Arnth Jensen, the association’s head. “Danes therefore directly benefit from the low rates. That’s not the case in other counties.”
To be sure, the long end of Denmark’s mortgage bond curve did see yields edge higher after Trump’s election win, on anticipation the former reality TV star will need to increase the supply of U.S. government bonds to finance all his spending plans.
The yield on the benchmark 10-year U.S. Treasury bond ended last week at around 2.36 percent, compared with less than 2 percent in October. Danish households pay roughly as much to borrow over a 30-year period. And there are signs their long-term borrowing costs may yet fall.
“The market’s still digesting” Trump’s victory, Heinig said. Initial expectations of higher inflation and growth are now being tempered by fears that his anti-trade talk may blunt any economic rebound, Heinig said. And then there’s the time element: it may be 2018 before Trump’s policies will truly be felt.
“That’s why there’s some rebounding” in bond markets now, Heinig said.
In the meantime, thanks to the mechanics of Denmark’s mortgage-bond market, households actually made money on the temporary increase in rates. Jyske Bank estimates that Danes trimmed as much as 8 billion kroner ($1.14 billion) off their debts as the value of their outstanding bonds fell last month. Given the uncertainty, Jyske is urging clients to switch to fixed-rate mortgages.