A $440 Billion Mortgage Market Offers Refuge From ECB Fallout

(Bloomberg) -- Offshore investors are flooding into AAA-rated Danish mortgage bonds, and now represent a bigger share of ownership in the $440 billion market than ever before.

As of April, non-Danish investors held 24 percent of the bonds, having more than doubled their presence since 2009, according to data published by the central bank in Copenhagen on Wednesday.

“We've had lots of approaches,” Jens Peter Sorensen, chief analyst at Danske Bank A/S in Copenhagen, told Bloomberg. He says interest is coming from buyers spread across central Europe to Asia, the U.S. and the U.K.

The bonds have grown in appeal because they're liquid, and because investors see them as a way to avoid price distortions caused by the European Central Bank's quantitative easing program, Sorensen said. For now, mortgage bonds are a way to dodge the bloated valuations created by QE. But they're also less exposed to the market jolts that might come when bond purchases are scaled back.

‘Ham-Fisted' QE

“Then there's the question of the timeline,” Sorensen said. “Tapering takes a long time. And the ECB is perfectly capable of being a bit ham-fisted in its efforts to scale back its purchases. ”

“My feeling is that as long as we have the Bank of Japan with a main rate of minus 0.1 percent, and the ECB's deposit rate at minus 0.4 percent, we'll see this demand trend for Danish mortgage bonds continuing for at least 12 to 24 months,” he said.

Hedge Funds

According to Sorensen, offshore investors now are more loyal than they've been in the past.

The “demand dynamic is different now,” he said. “There was a time when it was a lot of U.S. hedge funds. Now, it's serious investors with sticky positions. These are pension funds, bank treasury departments, life insurers, and the like. They've really spent a lot of time going over the merits of putting their money into Danish mortgage bonds.”

“I'm looking for things that might prompt these investors to start selling Danish mortgage bonds, but I just can't find any,” Sorensen said.  

To contact the reporter on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net.

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net, Jonas Bergman at jbergman@bloomberg.net.