Denmark’s third-largest labour-market pensions provider Sampension has increased its holdings in Danish mortgage bonds over the course of this year and is ready to buy up more if the current round of issuance results in higher short-term yields.
The DKK257bn (€34.3bn) pension fund said it has also been building up its investment in callable bonds this year.
Henrik Olejasz Larsen, investment director at Sampension, said: “Over the course of the year, we have increased our holding of Danish mortgage bonds – fixed interest bonds – which we are very keen on, from a fundamental point of view.”
He said Sampension was following the current round of auctions now beginning in Denmark for the refinancing of adjustable-rate mortgages (ARMs), even though this short-term paper was not traditionally of interest to long-term pension investors.
He said the buyers of such bonds were typically banks, which held the notes as part of their liquid asset holdings.
“If it turns out that interest rates on shorter-term ARMs should rise in isolation, then we will be ready to buy,” Olejasz Larsen said.
A side-effect of this would be that Sampension, as a big investor, would have a stabilising effect on the price development in the ARM market, he said.
“But we emphasise that our aim is solely to achieve a high long-term return for our pension customers,” he said.
Olejasz Larsen said the mortgage credit institutions had done a lot to guard against negative consequences of the “event risks” of the auctions, by increasing the loan terms and spreading the auctions throughout the whole year, which was why there were now four annual auction dates.
In its traditional with-profits pensions business, Sampension said it had DKK87bn invested in bonds overall at the end of September, which included DKK20.4bn in Danish mortgage bonds.
Investment-grade bonds make up 66% of the traditional with-profits investment portfolio.
Sampension has also been increasing its investment in callable mortgage bonds, as it takes the view that the spread between yields on these bonds and other bonds with the same level of risk have become too wide.
“For various reasons,” Olejasz Larsen said, “the supply of these very traditional fixed-yield and callable loans for homeowners has grown significantly, and, in the wake of that, prices have become more attractive for us as investors.”
He said Sampension, compared with foreign investors, was also perhaps more familiar with Danish mortgage credit.
“The way the individual bonds are arranged is often very complicated, but this presents no barrier for us,” he said.
Commenting on the outlook for bond yields generally, he said both short and long-term yields seemed to be too low at the moment compared with the real economic development in Europe and the US.
But Sampension expects the low level of yields throughout the entire yield curve to continue in 2016.