Various denominations of Danish kroner currency notes are seen in this arranged photograph in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Zero Loses Its Magic in World's Biggest Covered Bond Market

(Bloomberg) -- The world’s biggest market for mortgage-backed covered bonds has just set another record.

The home-loan arm of Denmark’s Jyske Bank A/S is offering a new bond, a callable note maturing in 2030 with a coupon of zero. Never in the market’s two-centuries-plus history has a bank pitched a bond with a coupon that low to finance a mortgage, according to the Silkeborg, Denmark-based lender.

Jyske said it’ll start offering loans funded by the bond on Monday, and it’s targeting primarily borrowers who want to improve their homes with a new kitchen or carport.

Other lenders are expected to follow, since 0.5 percent bonds maturing in 2030 are trading above par, meaning the series will close. Analysts say the development reflects increased demand for highly rated notes as prospects for Europe’s economy darken.

It’s also a sign of how distortions from extraordinary monetary policy have become unremarkable.

“This is to a large extent a relative game,” said Anders Aalund, chief Danish rates strategist for Nordea Bank Abp in Copenhagen. “Zero is no magical boundary for investors.”

Yields on non-callable one- to three-year bullet bonds, used to finance adjustable rate mortgages, have been below zero for years now. And in recent refinancing auctions, interest rates for borrowers fell to new lows, according to the mortgage arm of Danske Bank A/S, which this month sold bonds for 49 billion kroner ($7.4 billion). It cited especially the turmoil in the financial markets at the end of last year.

The zero coupon bond likewise reflects the fact that there’s lots of liquidity sloshing about and too few highly rated assets.

Excess Liquidity

“It is basically due to ‘too much money chasing too few bonds’,” Jens Peter Sorensen, chief analyst at Danske Markets, said. “Excess liquidity is high and demand for Danish mortgages is strong – buy safe assets in an unsafe world!”

The market’s awash in money partly because of a high level of redemptions and prepayments, he said. In addition, Danish pension and insurance companies don’t have to use as much of that money to pay taxes, because 2018 wasn’t a particularly good year for profits.

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Danish investors will probably be the biggest buyers of the bonds, Aalund said, partly because there are typically fewer notes offered with that maturity and foreign investors prefer to buy into bigger series.

Also, Danish investors have had an easier time wrapping their heads around sub-zero, he said.

“There are some for whom zero isn’t really attractive; there are a few for whom this is a magic number,” Aalund said. “The ones that have zero as some kind of mental boundary are normally investors in the 30-year bonds, primarily foreigners.”

Meanwhile, coupons on those too are headed down. Several mortgage banks earlier this month said they’ll be offering 30-year bonds with coupons of 1.5 percent, after those with a 2 percent coupon traded above par, closing the series.

©2019 Bloomberg L.P.