Pros and cons of Danish mortgage bonds
Many people are pessimistic about the markets. Danish mortgage bonds are traditionally used as a safe haven. Should investors buy Danish mortgage bonds right now?
As a long term investment Danish mortgage bonds are not bad. If you have a 20-year-perspective, they are the right investment.
But 20 years is very long term.
I’m 53 now. I have a clear picture which life I want to live in 15 – 20 years. If I want my dreams to become true, that requires money and a certain stability of my investments. In our world stability is an exception. We looked it up. Since 1954 we had nearly a crisis every year. There are tons of crises and they keep coming. We might have a new one tomorrow, we have to get used to crisis. Our investments are better off if we take that in to account.
So where can you find stability in investments?
Since 1797, that is 218 years back in history, there has been no default in Danish mortgage bonds. The reason for that is their balance principle. The most important part of this principle is, that there is a mortgage institute not a mortgage bank involved. Banks can go down. The Mortgage institute issues a bond and serves as settlement centre. The borrower is borrowing this bond. Investors buy the exact mortgage bond via the stock exchange. Borrowers get the money. All risk is transferred to the bond investor. This balance principle is unique for Denmark.
Do the Rating Agencies approve the stability?
S&P, Fitch, Moodys, they all like the principle. With only a few exceptions Danish mortgage bonds have AAA ratings.
So the yield must be very low?
It’s comparatively high. The yield is 350 basis points above German government bonds at the moment.
So what speaks against a short term involvement?
The volatility has risen quite dramatically. Another problem is the liquidity. If you need to buy and sell, it is not easy to get along in the bond market.
What is the reason for that?
In the old days the liquidity came from a lot of places, market makers, banks and the Treasury Department. That changed a lot. The regulations have squeezed the liquidity. Banks have cut the credit-lines and repo lines are now significantly lower.
Stig Brammer, product specialist at Danske Invest, was one of the speakers at the Nordic Investment Managers Forum, which took place in Luxembourg in October 2015.
David Bakkegaard Karsbøl is a fund manager and chief stategist at Sparinvest. He was one of the speakers at the recent Nordic Investment Managers Forum, which took place in Luxembourg. Read his views on factor based investing here: http://www.investmenteurope.net/opinion/the-outperformance-from-combining-factors/
Anders Tandberg-Johansen, head of Global Technology and fund manager with DNB Asset Management was another speaker at the event. Read his views on tech here: http://www.investmenteurope.net/opinion/dnb-tech-manager-tandberg-johansen-there-are-so-many-good-stories-out-there/2/
Further information on the event and the speakers is available at the event website (www.nimf.lu) and via its dedicated LinkedIn page (https://www.linkedin.com/company/nordic-investment-managers-forum?trk=company_logo).