Land With Record Negative Rates Is Ill Prepared for Turnaround

(Bloomberg) -- Homeowners in Denmark must brace themselves for bigger increases in mortgage costs than elsewhere in Europe once interest rates start to rise.

That's according to Nykredit, Denmark's biggest mortgage lender, which is warning Danes not to get too used to ultra-low rates.

“We could see some rather big upward fluctuations in Danish rates once inflation and policy rates starts rising,” Tore Stramer, Nykredit's chief economist, said in a phone interview.

Denmark holds the world record in negative rates, as the central bank's policy rate has been below zero for the better part of half a decade. About a fifth of the country's covered bonds now have negative yields, according to Nykredit data released this week.

But rates in Denmark's AAA-rated mortgage market have been kept unnaturally low by foreign investors in search of yield during times of crisis. Once the global recovery makes other markets more attractive, a sizable share of them will inevitable leave, pushing Danish rates up.

“Denmark has benefited from being a save haven economy,” Stramer said. “Once rates start rising, more and more investors will look elsewhere, and that will in turn accelerate the rate increase” in Denmark, he said.

Foreign ownership of Danish mortgage bonds has doubled to about 700 billion kroner ($110 billion) since 2011, with overseas investors now holding almost a quarter of all bonds backing mortgages, central bank data for October show.

To be sure, Danes have already started hedging against rate rises, with fixed-rate mortgages accounting for 42 percent of the total in November, up from 40 percent a year earlier. Also, there's probably still some time before the cycle turns and rates start to rise. Nykredit, for example, expects both the Danish and the European central bank to keep interest rates unchanged this year.

At the same time, nearly 100,000 Danish homeowners have never experienced owning a home while policy rates were above zero, Stramer estimates, so the longer the spell of ultra low rates persists, the bigger the risk that panic will spread through the market when rates do actually rise.

“That's a recipe for making people blind to the risk of future rate increases,'' Stramer said.

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

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Christian Wienberg, Nick Rigillo

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