Denmark’s biggest pension fund, state-backed ATP, says concerns that the nation’s one-year mortgage bonds are feeding instability in the economy are overblown.
The investor, to which all working Danes are required by law to contribute, says issuers including Nykredit Realkredit A/S and Realkredit Danmark A/S have already addressed risks related to asset and liability matching.
“There were pockets of risk, mainly from the refinancing, but that issue has been properly addressed and we’re very comfortable with the Danish mortgage financing system now,” Anders Svennesen, co-chief investment officer at ATP, said in an interview. “It’s important for us to be able to invest in short-term interest rate products that are very safe.”
Denmark’s central bank and the head of a government-appointed commission probing the causes of the nation’s 2008 housing slump have both pinpointed one-year mortgage bonds as a threat to the $355 billion economy. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings all warn that use of the short-term bonds to finance mortgages as long as 30 years poses risks to issuers. And as new funding requirements loom, banks may need to dump the bonds, deemed too short to be stable by the Basel Committee on Banking Supervision.
Yet the one-year mortgage bonds are trading at levels that suggest investors aren’t too concerned.
The yield on Nykredit’s mortgage bond due April 2014 was about 0.3 percent yesterday. The spread on the 2014 Nykredit note relative to the interpolated government yield curve narrowed to 19 basis points yesterday from as wide as 40 basis points in March, according to data compiled by Bloomberg.
A committee appointed by the government to identify Denmark’s too-big-to-fail banks said in March systemically important lenders should aim to comply with a basic stable funding level from 2014. That’s four years earlier than a target set by the Basel committee, which Denmark says it will incorporate into its final rules.
“It’s a step in the right direction that the Sifi proposal raises the issue of the funding mismatch,” Alexander Ekbom, a Stockholm-based S&P credit analyst, said in a July interview. “But we’re not sure that it will lead to a sufficient solution.”
According to Svennesen, investors don’t see the same issues that rating companies have cautioned against. ATP held 58.7 billion kroner ($10.5 billion) in Danish mortgage bonds at the end of 2012. While Svennesen declined to give a breakdown of maturities, he said the fund finds one-year bonds “more interesting” than three- and five-year mortgage securities.
“Issuers have made the adjustable rate mortgage bonds even more safe in different ways,” by raising administration fees or capping how much of a mortgage can be backed by that type of security,’’ he said. “We welcome these actions.”