World Record Holder in Negative Rates Sees Jump in Risk Aversion

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After almost half a decade of negative interest rates, homeowners in Denmark’s mortgage bond market are growing wary of the cheapest loans.

Central bank data show borrowers in the country with the longest history of sub-zero rates are trying to lock into long-term mortgages at fixed rates, with a 10 percent jump in that loan category in June compared with a year earlier. And with Britain’s exit from the European Union set to extend the era of ultra low rates, Denmark’s biggest mortgage bank says a shift into safer assets will probably continue.

The shortest Danish mortgages have negative interest rates, and about 60 percent of homeowners still prefer them because they’re paid to borrow, excluding the administrative fees they hand their banks. But the loans are risky because they need to be refinanced as often as once a year, threatening to upend a household’s finances should the covered bond market turn.

Yet as interest rates drop across all maturities, Danes can now borrow for 30 years at 2 percent. That’s less than the U.S. government pays its creditors. And with Brexit triggering investor alarm, demand for the safest markets is already supporting AAA assets such as Danish mortgage bonds.

“Brexit is behind the relatively big and noticeable interest rate shift of late,” Jeppe Borre, senior economist at Nykredit, Denmark’s biggest mortgage bank, said in an e-mail on Wednesday. “The Brexit effect has yet to feed through to the data, but it will probably mean that even more homeowners will want to shift into fixed-rated loans and out of variable rates.”

Denmark’s benchmark deposit rate has been mostly negative since July 2012. The central bank raised the rate by 10 basis points to minus 0.65 percent in January, but was forced to shelve further efforts at policy normalization amid continued stimulus from the European Central Bank and demand for assets denominated in the Danish krone, which is pegged to the euro.

“Even though low rates are likely to persist, the normalization of monetary policy is under way in the U.S., albeit at a slower tempo than previously assumed,” Borre said. But the upshot is that homeowners may face “increasing interest rates. And in the slightly longer run, monetary policy normalization will also come to the euro zone.”