As bond market dries up in Denmark, investors look for more liquid assets

A cyclist rides past the Copenhagen Stock Exchange in Denmark. The turnover of bonds on the CSE dropped 46% in February from the previous month, and even that may be an understatement as traders are not obliged to report all trades to the exchange.

Reuters/Copenhagen


Denmark’s 700bn crown ($99bn) government bond market has been hammered by the central bank’s January decision to halt government bond issuance, and analysts say investors are looking to park their money in other assets.
Denmark stopped selling new bonds to investors in January in a bid to reduce demand for the crown, which remained strong even after the central bank cut its deposit rate deep into negative territory. But the move risks slowly killing off the market and driving investors away.
The turnover of government bonds on the Copenhagen Stock Exchange dropped 46% in February from the previous month, and even that may be an understatement as traders are not obliged to report all trades to the exchange. “The liquidity has been reduced a lot and in the long term, the market cannot live with that,” Chief Analyst Anders Aalund from Nordea Markets said.
Speculators had been pouring money in to Danish assets, betting Denmark would drop its three-decade-old currency peg and let the crown rise, after the Swiss National Bank scrapped its cap on the franc against the euro on January 15 and the European Central Bank announced a €1tn stimulus programme.
But they now seem to have given up on those bets and instead are moving their money out of the bond market. “We are using government bonds denominated in euros and Danish mortgage-backed bonds more nowadays,” said Poul Kobberup, head of fixed income at PFA Asset Management. The bid-offer spread has widened considerably, making it more costly for investors to move around in the Danish government bond market, portfolio manager Anders Isager from asset manager BankInvest said.
“When bid-offer spread widens from around 1 basis point or 5 cents to 10 to 15 basis points or 50 to 85 cents for the five-year government bond, we then don’t want to buy or sell a lot in that paper,” Isager said.
The central bank said in December that it aimed to issue domestic bonds in 2015 worth 75bn Danish crowns. But it also said the government had sufficient cash on hand to cover any deficit this year.