(Bloomberg) -- PFA A/S, Denmark’s biggest commercial pension fund, said it won’t put more money into the nation’s mortgage-backed covered bonds as a regulatory onslaught prompts investors to shy away from the securities.
“All this political uncertainty makes us a lot more uneasy about Danish covered bonds,” Poul Kobberup, head of fixed-income investments at PFA in Copenhagen, said in an interview. “We’re not putting more money in Danish mortgage bonds as long as the uncertainty persists.”
Danish draft legislation affecting short-term mortgage bonds and a plan by the European Banking Authority to recommend that covered bonds not be given the highest liquidity stamp may trigger a capital outflow from Denmark as investors balk at the changes, according to Helge Pedersen, chief economist at Nordea Bank AB in Copenhagen. He warns the development even risks putting pressure on Denmark’s krone peg to the euro.
“We know how international investors think, and will stay on the sidelines as long as the uncertainty persists,” said Kobberup, who managed $47 billion in assets at the end of 2012. “Uncertainty only serves to keep investors away.”
The yield on Nykredit Realkredit A/S’s 2% mortgage note due April 2016 rose to 0.491% as of 11:20 a.m. in Copenhagen, its highest since Nov. 6, according to data compiled by Bloomberg. The krone, which the central bank uses monetary policy to fix to the euro, eased to its weakest since July in intraday trading today.
Denmark’s mortgage system is being buffeted on multiple fronts as global regulators and rating companies question the safety and stability of the two-century-old market. The government unveiled a bill on Nov. 28 forcing investors to accept possible maturity extensions on short-term mortgage bonds to address refinancing risks.
The same day, it emerged that the EBA will advise the European Commission to limit banks’ use of covered bonds in their liquidity buffers. Danish financial institutions held about 34% of the country’s mortgage bonds last month, according to central bank data. Rules preventing lenders from using the bonds for liquidity management would trigger a sell- off, the industry warns.
Danske Bank A/S, Denmark’s biggest bank, advised investors to reduce their overweighting in mortgage bonds in 2014, in a report published Dec. 6.
“We halve our overweight position in mortgage bonds against Danish government bonds,” Danske said. The EBA’s recommendation that mortgage bonds not be given the same liquidity status as sovereign debt “could have a negative impact on the price of short non-callable bullets in particular,” according to Danske.
“We’re not very exposed to short-term mortgage bonds as we mainly engage annuity investments,” Kobberup said. “The bonds we do hold, we hold for liquidity purposes.”
For PFA, there are alternatives to Danish covered bonds for liquidity management and currency isn’t a limitation.
“If we were forced to buy euro-denominated bonds instead of krone adjustable-rate bonds it wouldn’t really be a problem,” Kobberup said. “We have plenty of other liabilities in euro to match it.”
Nykredit Realkredit A/S, Europe’s biggest issuer of covered bonds and Denmark’s largest mortgage bank, said today it will cut 300 jobs as part of a cost-cutting plan to adjust to the tougher regulatory environment.
Denmark’s government has said it will do everything in its power to persuade the European Commission not to follow the EBA’s recommendation on covered bonds. Business Minister Henrik Sass Larsen said last month he’s confident Denmark will prevail.
The EBA isn’t due to publish its final recommendations until later this month, with draft technical standards set to be finalized by March. The European Commission is scheduled to decide in June.
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