Brexit Sends Danish 30-Year Mortgage Costs Below U.S. Treasuries

In Denmark, you can get a 30-year home loan and pay your bank less than the U.S. government pays its creditors.

The Danes to a large extent have Britain’s “Leave” camp to thank as the campaign to exit the European Union has investors seeking refuge in markets they perceive as safe, such as AAA-rated assets in Danish kroner.

Denmark’s $450 billion bond-backed mortgage market has already gone through several extremes since the central bank four years ago first resorted to negative rates to defend the krone’s peg to the euro. Most strikingly, rates on short-term mortgages dropped below zero. Now, with the risk of a so-called Brexit looming, investors trying to get their hands on Denmark’s top-rated assets are finding that its mortgage bonds offer more liquidity than government debt, making the securities a magnet for safe-haven flows.

“It’s a Brexit hedge case,” said Jan Weber Oestergaard, senior analyst at Danske Research. “We’re seeing a lot of interest from foreign clients.”

Fears the U.K. may actually opt to exit the EU triggered a global selloff on Monday, with equities and the pound suffering losses. Safe-haven demand fanned gains in the Japanese yen and gold.

“If we see more uncertainty, then we could see even tighter spreads” in Danish mortgage bonds, Oestergaard said.

For more on how markets are responding to Brexit fears, click here.

Mortgage banks in Denmark stop offering loans when the bonds funding them trade above par on the secondary market. Until recently, lenders were largely dispensing 30-year mortgages with coupons of 2.5 percent.

But the bonds behind them have climbed above 100 in recent days. If demand persists and the notes stay above par, lenders will start offering mortgages at 2 percent and 1.5 percent on 30 year maturities. The U.S. government’s 2.5 percent 30-year bond yielded about 2.45 percent at the end of last week.

“Not to my knowledge” do other countries have 30-year rates as low, said Karsten Beltoft, director of the Danish Mortgage Banks’ Federation. In fact, loans with rates fixed for that long are a rarity in themselves. “It would be a surprise because in general we have some of the lowest rates in Denmark, and people are coming from all over the world to hear about our negative rates,” he said.

The last time Danish mortgage-bond yields fell to current levels, borrowers refinanced en masse, piling into loans with longer maturities at an unprecedented level. That was last year, after Switzerland sent its franc into a free float, triggering speculation Denmark might follow and unleashing unprecedented central bank stimulus.

Fixed-rate loans now make up about a third of Danish mortgage lending. The development has been a windfall for banks, which are under pressure from regulators and ratings companies to cut the proportion of loans backed by short-term bonds to reduce refinancing risks.

Part of the allure for investors, besides Denmark’s AAA credit rating, is the way the mortgage-bond market works. Cover pools are protected against insolvencies and over-collateralized, earning them the highest ratings in many cases. What’s more, borrowers can’t walk away from their debt.

But the fate of Danish homeowners now depends to a large extent on how Britons vote on June 23. If the U.K. stays in the EU, Danish mortgage-bond yields probably will return to more normal levels, according to Beltoft.

But if Britain votes to leave, “the uncertainty will increase and we’ll have an escape to safe havens for a longer period,” Beltoft said. “Until the referendum, we’ll have uncertainty and for that period I expect we’ll have 2 percent loans.”

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