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Japanese investors pile into world's biggest covered bond market
[COPENHAGEN] Japanese investors are buying up Danish covered bonds at a pace that hasn't been seen in years.
According to Nordea Bank Abp, Japanese investors bought about 2 billion kroner (S$408.8 million) in callable bonds in May, bringing total investments in the long-term, fixed-rate securities to 10.3 billion kroner this year.
That's 1 billion kroner more than in all of 2017 and catching up fast to the 13.8 billion kroner they bought in all of last year, according to Nordea senior analyst Kia Marie Rasmussen.
"The continued buying from Japanese investors despite of high prepayments signals that the Japanese investors has been very thorough in understanding the asset class," she said.
They "are already aware of the risk of prepayments and are therefore not 'scared off' by the increased prepayments".
The surge in Japanese demand for Denmark's AAA assets comes as the market, the world's biggest for covered bonds, braces for what's likely to be a record wave of mortgage refinancing.
Fresh figures show prepayment notifications rose more than 50 per cent in a week. Borrowers who fund loans with callable bonds may call the securities at par each quarter. The next deadline for notifying banks is July 31.
Jeppe Borre, an analyst at Denmark's biggest mortgage lender, Nykredit Realkredit A/S, said in a note that at this rate, as much as 200 billion kroner in bonds may be repaid this quarter. Most borrowers are switching into 1 per cent, 30-year mortgages.
Ms Rasmussen says Japanese investors don't seem to be flustered.
"A coupon of 1 per cent is record low and therefore uncharted territory, but we would expect the interest to continue since rates on alternative investment opportunities has dropped as well," she said.
The last time Japanese investors piled into Danish long-term bonds was in 2016, when the UK's vote to leave the European Union sent investors hunting for havens.
The current demand for highly rated assets last week drove yields for the entire Danish government bond market below zero.
Bonds with maturities up to 10 years have been trading at yields below zero since May, but last week yields on government debt due in 2039 have dropped below zero, at about minus 0.03 per cent. Globally, more than US$13 trillion in debt yields less than zero.