Investors Pay Danes to Finance Mortgages in Negative-Rate Record

  • Danish adjustable-rate mortgage auctions started on Monday
  • Investors are paying borrowers to finance their homes

In the land of negative rates, yet another record has been set.

Danish mortgage refinancing auctions that started on Monday saw the cost of short-term funding drop further below zero than ever before, at the country’s two biggest home finance institutions. At Realkredit Danmark A/S, the mortgage arm of Danske Bank A/S, rates fell to minus 0.07 percent (including issuance fees). At Nykredit A/S, they edged even lower, to minus 0.08 percent.

Though borrowers still need to pay additional fees to their banks to process the loans, the initial auction results show that investors are willing to pay Danish households more than ever before for the privilege of lending them money. Jeppe Borre, a senior economist at Nykredit in Copenhagen, says it marks a “new page in the record book of interest rates” which is “already fat.”

Monday’s results were the first from a series of auctions that will run through the week. The final interest rate is calculated as an average of the auctions. Borre says there’s every likelihood the low rates being offered at this early stage are “going to continue.” Record lows were also set for yields on five- and three-year mortgage bonds at Monday’s auctions.

On Tuesday, both Nykredit and Realkredit Danmark recorded rates at the same low level as the previous day.

“There’s no doubt the low rates are an important contributor to growth in the Danish economy,” Sonia Khan, a senior economist at Realkredit Danmark, said in a note.

Denmark’s $430 billion AAA-rated mortgage-backed covered-bond market is the largest of its kind in the world. About 60 percent of the market is made up of the type of adjustable-rate mortgage bonds being refinanced this week, with a total of 122 billion kroner ($18 billion) set to be rolled over, Realkredit Danmark estimates.

Yields in Denmark’s mortgage-bond market have been anchored by the country’s negative central bank rate, which policy makers first tested in 2012 to defend the krone’s peg to the euro. The benchmark deposit rate is now minus 0.65 percent, and most economists don’t expect rates to climb above zero until some time in 2018 at the earliest.

While longer-term Danish mortgage bonds got caught in some of the selloff that hit fixed income markets across the globe after Donald Trump won the U.S. election, investors have continued to snap up short-term bonds on a bet monetary policy in Europe will keep yields low.

“If you look at the long rates, they were influenced by the presidential election,” Borre said. “The thing that is driving the short end is European Central Bank policy,” where “the expectation is that they are going to keep on with negative rates for a couple of years from now.”

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