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Yield-curve inversion hits world’s biggest covered-bond market

Banks in Denmark are offering bonds with maturities of one to five years.

For the first time since the financial crisis, yields at the very shortest end of Denmark’s $500 billion covered-bond market are higher than on longer-dated notes.

Mortgage banks holding quarterly refinancing auctions in Denmark are offering bonds with maturities of one to five years, and Nordea Bank estimates that about 38 billion kroner ($5.7 billion) in bullet bonds will be refinanced. But investors are cooling to the shortest bonds, according to Lise Bergmann, chief analyst at the Danish mortgage unit of Nordea in Copenhagen.

The yield on one-year bonds sold at auction on Wednesday was minus 0.43%, Nordea said. That compares with minus 0.58% for three-year bonds and minus 0.51% for five-year bonds. In the market for callable mortgage bonds, Jyske Bank A/S this month started offering a 10-year note at a coupon of minus 0.5%.

The last time investors preferred longer-dated bullet bonds over one-year notes was around 2006-2007, Bergmann said, just before the global economy lurched into the worst financial crisis since the Great Depression. Back then, investors ended up being proved right to shun the shortest notes, as a wave of monetary easing drove yields even lower, she said.

“We don’t know yet whether investors will be better off with three-year and five-year bonds than with one-year bonds,” Bergmann said. “It depends on what happens with rates in the coming years.”

© 2019 Bloomberg L.P.

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