Draghi squeezes call option out of Danish bonds

Copenhagen

AS European Central Bank (ECB) president Mario Draghi prepares to start purchasing euro-area bonds, the effects of the policy are already being felt in Europe's biggest mortgage-backed covered bond market. Denmark's mortgage banks are about to start issuing loans backed by 30-year bonds at a 2 per cent fixed rate. By comparison, the German government pays a 2.5 per cent coupon on its benchmark 30-year bond.

Nykredit Realkredit A/S, Denmark's biggest home-loan provider, estimates Danes may convert as much as 500 billion kroner (S$107 billion) in mortgages to take advantage of the nation's cheapest-ever fixed rate. What's more, the record-low borrowing cost means homeowners probably won't get a chance to call in their debt to convert to a loan with lower rates, thereby removing a risk factor from the bonds for investors. "What makes this bond interesting" is "that it's less likely to be called ahead of maturity," said Sune Worm Mortensen, head of mortgage research and customer advice at Nykredit in Copenhagen. "There's only a limited risk that this 2 per cent bond will be called."