Fallout of Speculative Attack Reverberates in Danish Bond Market

  • Government bond liquidity is yet to recover since auction halt
  • Denmark’s pension funds urge central bank to add measures

Denmark’s currency regime came under a speculative attack two years ago. Denmark won and the speculators lost. But in the bond market, the damage can still be felt.

The central bank now needs to pay banks to entice them into pricing government bonds. It announced the measure earlier this month in an effort to restore liquidity following policy steps designed to fight speculators in 2015. Though a step in the right direction, it won’t be enough, according to two of Denmark’s biggest bond investors.

The measure is “very welcome,” Christian Lindstrom Lage, chief investment officer at PFA Pension, Denmark’s largest private pension fund, said in an interview. “But it won’t provide the full solution.”

Denmark’s central bank will start paying banks as much as 25 million kroner ($3.6 million) a year to set government bond prices more frequently. The idea, which is a trial set to run for the rest of the year, is to get spreads between bid and ask prices to narrow in Denmark’s $122 billion AAA-rated government debt market.

The central bank says it’s trying to improve liquidity, “but we will now have to wait and see” how the cash payment to banks works in practice, Lars Mayland Nielsen, head of monetary policy operations and government debt at the central bank, said in an e-mailed reply to questions.

“We’re still short of having established market making in government bonds with multiple participants,” said Poul Kobberup, head of fixed income investments at Danske Bank’s pension unit, Danica. The central bank plan is “a good effort” but it “probably won’t have a large impact on the market,” he said.

Read more: Bond liquidity dead in Denmark as top fund considers options

Liquidity has evaporated across much of Europe as the ECB buys up debt as part of its asset-purchase program. Tougher regulatory requirements forcing banks to stuff liquidity buffers with government bonds have added to the problem.

But for Denmark, it was the January 2015 attack on the krone’s peg to the euro that proved particularly harmful to liquidity. The central bank, which pushed interest rates well below zero to deter investors from hoarding kroner, also switched off bond sales for eight months to keep speculators out. That move, though effective at the time, came at a cost and some investors are now reluctant to come back.

Though Denmark is one of the few sovereign issuers left in the world still to enjoy AAA credit ratings at Moody’s, S&P and Fitch, the lack of liquidity could ultimately prove a turn-off for offshore investors, according to Jan Storup Nielsen, a senior analyst at Nordea Bank AB.

“When international investors look to Denmark they consider two things: credit quality, which is undisputed, and liquidity, and the latter may cause some to stay away,” Nielsen said by phone.

According to PFA’s Lage, it will be difficult for Denmark to improve liquidity as long as the ECB’s asset buying program continues. But the Danish central bank’s offer of a cash reward could help flows and encourage investors to “stick around and support trading in Danish government bonds,” he said.

— With assistance by Nick Rigillo

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