The Bank of Japan’s surprise decision to loosen its grip on bond yields threatens to spark a selloff on the other side of the planet in Denmark, home to the world’s largest covered bond market.
Denmark’s $500 billion market has been a favorite among investors from Japan, lured by AAA ratings and higher yields than at home. While Japanese ownership has declined in recent years, it still represents about 3.4% of the market, where local pension funds are the top owners, according to data from Totalkredit, a unit of Denmark’s biggest mortgage lender Nykredit Realkredit A/S.
Read More: Why Denmark’s Mortgage Market Lures Global Investors
The Bank of Japan jolted financial markets on Friday after saying its 0.5% ceiling on 10-year yields was now a reference point, not a rigid limit, as it sought to make its easing program more flexible. It will also offer to buy 10-year government debt at 1% each day.
“All else being equal, the BOJ decision means that Japanese bonds have become more attractive to Japanese investors, and therefore one could imagine they will buy fewer Danish mortgage bonds, and perhaps even sell them,” Anders Aalund, head of fixed income trading strategy at Nordea Markets, said by phone. He expects the Japanese share of Danish mortgage bonds will continue to decline in light of the move.
Japanese ownership of the Danish mortgage bonds peaked at the end of 2020 at almost 10% of the market. But despite a decline in recent years, investors from the Asian nation are still an important part of especially the market for Danish fixed-rate mortgage bonds, said Sune Malthe-Thagaard, chief analyst at Totalkredit.
Even if Japan’s policy change is “a matter of fine-tuning” it can have “a major impact on Danish homeowners with fixed-rate loans,” Mathias Dollerup Sproegel, senior economist at Sydbank A/S, said in a note to clients.
“If the Bank of Japan continues to tighten monetary policy and thus allows higher and higher interest rates in Japan, this may mean that it will become more expensive to buy a home in Denmark.”
