Mortgage Bond Rally Falters as Nykredit Bets Turn: Nordic Credit

Mortgage Bond Rally Falters as Nykredit Bets Turn
A logo sits outside the headquarters of Nykredit A/S in Copenhagen. Nykredit said yesterday profit after tax in 2012 more than doubled to 2.6 billion kroner ($477 million) after returns on its mortgage bonds surged. Photographer: Ulrik Jantzen/Bloomberg

Europe’s biggest issuer of covered bonds backed by mortgages is avoiding its own market on a bet the securities have passed their peak.

The Nykredit Index of the most-traded Danish mortgage bonds has retreated from a December high as investors turn their backs on haven assets amid signs Europe’s crisis is abating. That trend is likely to continue and Nykredit A/S is now cutting its holding of the safest mortgage bonds, according to Soren Holm, the chief financial officer at the Copenhagen-based bank.

“Prices have increased and the spread has gone down so much on mortgage bonds that we don’t think it’s realistic that they will go down further in the short term,” Holm said in an interview yesterday. “And with interest rates so relatively low, it’s more likely that they will increase.”

Nykredit sold 50 billion kroner ($9 billion) in mortgage bonds from northern European issuers in the second half of last year, Holm said. The sell-off of haven assets left government bonds from AAA rated Denmark the world’s worst debt class so far in 2013, delivering investors a 2.5 percent loss since Dec. 31. The difference between Danish yields and their German counterparts has moved from negative last year to positive, and was at its widest this week since November 2011.

Yield Spread

The difference in yield on Nykredit’s 4 percent callable mortgage bond due October 2025 and Denmark’s 1.5 percent 2023 government bond widened to 119 basis points yesterday from as low as 114 basis points on Jan. 30. The Nykredit bond’s spread relative to Germany’s 10-year benchmark bond yield widened to 134 basis points this week, from 123 basis points on Jan. 30.

Nykredit said yesterday profit after tax in 2012 more than doubled to 2.6 billion kroner ($477 million) after returns on its mortgage bonds surged. Without the windfall from its portfolio of the securities, the closely-held bank’s profits don’t look so good, Holm said. Nykredit needs to earn more from its core business to help it meet stricter capital requirements, he said.

“In the first half year of 2012, we had an extra approximately 50 billion kroner more invested in mortgage bonds -- northern European -- against government bonds,” Holm said. “This is the main reason for the strong investment result.”

At the height of Europe’s debt crisis last year, the central bank in Copenhagen fought off a capital influx by sending its deposit rate below zero for the first time in its almost-200-year history. The July cut followed investor fears that the euro zone might experience its first sovereign default, making preservation of principal key even as some yields went negative.

Draghi Effect

After European Central Bank President Mario Draghi later the same month pledged to do whatever it takes to protect the euro, investor panic abated, as did demand for haven assets. Danish bond yield spreads relative to German bunds went from negative to positive.

“The European crisis seems to be going away at the moment,” Holm said. “Money that flowed into Denmark will flow out again.”

The central bank last month raised interest rates for the first time since July 2011, bringing its deposit rate to minus 0.1 percent from minus 0.2 percent. It raised the benchmark lending rate to 0.3 percent from 0.2 percent. The bank doesn’t hold scheduled meetings and only adjusts rates to maintain the euro peg.

The ECB yesterday kept its main rate at 0.75 percent. Helge Pedersen, chief economist at Nordea Markets in Copenhagen, said that takes some pressure off the Danish central bank.

“For now, the Danish central bank is on standby,” he said.

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