DENMARK - Danish pension funds are reverting back to the Danish-Kroner denominated bond market as the search for euroland bonds cools.
This is one of the main findings of Nykredit Markets quarterly survey into investment trends in the insurance and pension fund markets. The survey is conducted in cooperation with Greens Institute of Market Research.
The predominant share of Danish investors’ bonds portfolios is DKK-denominated and in a reversal of the recent trend this portion has increased in the second quarter of 2002. The falling DKK-share was driven by the insurance market and pension sector’s purchase of duration outside the Danish market - in euro government bonds. But the euro share has this quarter gone down from 16% to 14.7% and the DKK-share is up from 77.7% to 81.5%. Investors also expect to further reduce their euro share in coming months in favour of DKK-denominated bonds.
In March the survey registered an increased dollar share which was probably due to a higher exposure in the dollar credit market.
“Since we first conducted this survey, we have noted that the pensions sector has diversified their bond portfolio out of DKK and into EUR and USD on an ongoing basis. For the first time, we have noted a reversal in this trend as we registered a small rise in the DKK-denominated share of the bond portfolio,” said Kare Hahn Michelsen, head of fixed income research at Nykredit Markets in Copenhagen.
“The reason why the DKK-denominated share stopped falling may be that long Danish bonds such as 7% DGB 24, 5% MTG 32 and 5% MTG 29 continue to be priced at levels where they generate a fair excess yield versus euroland. The yield level of for example 7% DGB 24 is 7-8bps above the equivalent German government bond (6.35% DBR 24) following a long period of being 6-7bps short.
“Combined with the normalisation in long Danish yields, the move out of EUR into DKK could also be an effect of the sector’s lower demand for bond portfolio duration as their liabilities have been hedged elsewhere - for example via an CMS floor or swaptions,” he added.
Concurrently with the limited interest in Jumbo Pfandbriefe, the share of credit bonds has risen markedly over the three months to June 2002. This could be interpreted as evidence of investors preferring the higher excess yield generated by credit bonds over Jumbo Pfandbriefe despite the fact that - regardless of the turbulence in the Jumbo market - “real” credit bonds incur a higher credit risk.
Overall allocation to bonds is relatively unchanged and remains at around 60%.
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