Danish Investors Balk as Debt Yields Turn Negative Amid Foreigners’ Buying

A surge in demand for Danish bonds and bills from investors seeking to escape Europe’s debt crisis is allowing the Nordic nation to get paid to borrow. Local buyers aren’t as enamored.

The country last week sold 2.02 billion kroner ($351 million) in two-month and five-month bills at negative yields. A central bank report yesterday showed foreign ownership of government debt rose to 35 percent in November, the most since October 2000, as investors outside Denmark raised their holdings by 49 percent to 267 billion kroner from a year earlier.

“There’s a lot of appetite for Danish debt,” Henrik Henriksen, chief investment strategist at PFA Pension A/S, which has assets of $53 billion, said by phone yesterday. “However, we do think that Danish bonds are looking a bit expensive now.”

European leaders are struggling to contain a debt crisis that has entered its third year and threatens Italy, the euro- area’s third-largest economy. While Denmark’s Social Democratic- led government plans stimulus to secure growth, debt investors are rewarding the country that has opted out of the euro. Its government debt will be 44 percent of gross domestic product this year, compared with a euro-area average of 88 percent, and the country is expected to be within the European Union’s 3 percent deficit limit by 2013, the European Commission said Nov. 10.

First Time

Denmark on Dec. 29 sold 1.8 billion kroner of 59-day bills and 220 million kroner of 151-day bills at negative yields of 0.21 percent and 0.07 percent, respectively. At the end of November, foreigners owned 56 billion kroner in Danish T-bills, 94.5 percent of the total, according to central bank data.

“It’s the first time that the Danish state has issued notes at a negative yield,” Ove Sten Jensen, a spokesman for the central bank’s debt office, said in a phone interview yesterday. “There are some investors who are very eager to place their money in papers where they are very certain to get the principle amount back.”

The yield on Denmark’s 2-year bond (GDGB2YR) fell five basis points to 0.09 percent today. The country’s 10-year notes yield 26 basis points less than German debt with a similar maturity. Danish government debt returned 13.45 percent last year, according to index compiled by Bloomberg and European Federation of Financial Analysts Societies. That compares with a gain of 1.5 percent for the euro area’s debt.

Increased Risk

The increasing level of foreign ownership in Danish debt may pose a risk, Bo Andersen and Frederik Nordsborg, economists at SEB AB, said in a note yesterday.

“We see the current tight pricing of Danish government bonds to contain a higher risk of underperformance if foreign investors lower demand for Danish government bonds, which for now, however, doesn’t seem to be the case,” the Copenhagen- based economists said in the note.

While a member of the EU, Denmark hasn’t adopted the common currency and its central bank keeps the krone fixed against the euro. The bank cut interest rates twice last month, bringing its benchmark (DERE) to a record-low 0.7 percent, to offset a capital influx as investors flee euro-denominated assets.

The central bank said today that it purchased net foreign currency of 17.8 billion kroner in December to defend the peg, the biggest monthly amount since May 2010, according to Nordea Bank AB. Overall, foreign currency reserves rose 14 billion kroner to 481.7 billion kroner, the central bank said.

Advance Financing

The bank said Dec. 15 it will finance the issuance requirement for 2013 one year in advance to reduce the refinancing risk after it sold more bonds than expected in 2011. The Finance Ministry on Dec. 19 raised its estimate for its 2012 gross domestic financing need to 179 billion kroner from an August forecast of 177 billion kroner as the government is bringing forward 10.75 billion kroner of investments to stimulate the economy.

Denmark is the Nordic region’s weakest economy as the country grapples falling consumer spending caused by housing prices that have dropped to a six year-low and a banking crisis that has sapped lending. GDP shrank 0.5 percent in the third quarter and there’s a risk the economy also contracted in the fourth quarter, according to Steen Bocian, chief economist at Copenhagen-based Danske Bank A/S, the country’s largest lender.

“It’s a reverse beauty contest where Denmark is looking less bad compared with most of the euro-zone economies,” said Henriksen at PFA.

To contact the reporter on this story: Christian Wienberg at cwienberg@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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