Danske Bank A/S’s pension unit, Danica, has been purchasing Italian debt in an effort to generate returns as short-term Danish benchmark yields go negative.
Danica, which had investment assets of about $50 billion at the end of June, holds about 7.2 billion kroner ($1.2 billion) in mostly Italian short-term notes and some Spanish debt, according to Peter Lindegaard, the chief investment officer at the pension unit of Denmark’s biggest bank in Copenhagen.
“In the long term, there might be issues regarding the euro, but in the short term, there is political will to save the situation,” Lindegaard said in an interview. “We think it’s a good risk reward.”
Italian 10-year yields surpassed 6.5 percent last month as confidence in the euro area’s ability to stop the debt crisis from spreading to the bloc’s third-largest economy waned. Yields have since eased as Prime Minister Mario Monti pledged spending cuts to tame the government’s deficit and persuade investors Italy won’t need a bailout.
Italy’s benchmark 5.5 percent bond due September 2022 yielded 5.78 percent at 2:22 p.m. in London today. Denmark’s 10-year benchmark note yielded 1.25 percent, or about 25 basis points less than similar-maturity German bunds.
The yield on Italy’s two-year note eased nine basis points to 3.333 percent, compared with minus 0.209 percent on similar-maturity Danish debt.
“It’s difficult to get a yield today on anything that is totally safe, so when you use your risk budget, you need to contemplate how to do that the best way,” Lindegaard said. “This is one of the more risky things, but you are being paid for it.”
At PFA A/S, Denmark’s biggest commercial pension fund, domestic yields around zero have also prompted the investor to turn to the euro area.
“We’ve been in the peripherals where we see more stable markets,” Poul Kobberup, head of fixed income at PFA, said in an interview. “It’s very attractive to go abroad, from a domestic point of view.”
Pension funds in AAA rated Denmark are stepping up their purchases of foreign bonds in an effort to boost returns. The shift may help offset a capital influx into Denmark that’s sent two-year yields below zero and forced the central bank to cut its deposit rate to minus 0.2 percent last month to defend the krone’s peg to the euro.
Danish pension and insurance funds increased their holdings of bonds from outside the Nordic country by 62 percent to 15.9 billion kroner in June, central bank data show. That compares with sales of foreign bonds of 26.7 billion kroner a year earlier.
Demand for higher-yielding securities follows a June decision by Business Minister Ole Sohn to ease pension industry discounting rules, enabling funds to purchase riskier assets over domestic bonds.
“Some might say: ‘We don’t want anything with Italy in it,’ but we haven’t taken that decision,” Lindegaard said. “The risk-reward is okay.”