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Danish pension funds voice worry about falling bond liquidity

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Major Danish institutional investors, including pension funds ATP, PFA Pension and Sampension, are concerned about the drying up of liquidity in the domestic bond markets seen over the last 10 years and say bond trading now requires significantly more resources, according to a new study.

The Danish Securities Dealers’ Association (Børsmæglerforeningen) and the Danish Bankers’ Association (Finansrådet) have conducted a study into how the country’s largest investors are experiencing liquidity in the bond market, which concludes that the development is clearly downward and worrying.

Peter Andersen, board member of the Danish Securities Dealers’ Association and chief executive of Jyske Bank Markets, said: “It is a worrying development that we are seeing on the bond markets.

“We must take these statements from the big investors very seriously,” he said.

In their research, the two associations held meetings with six institutional investors during the spring — ATP, Sampension, PFA Pension, Nykredit Asset Mangement, Danske Capital and Nordea Investment Management.

The associations said a general impression from the talks was that all the investors were experiencing falling levels of liquidity on the bond markets and expressed concern about the development, particularly on the mortgage bond market.

Strong liquidity on the bond market was crucial for the efficiency of the mortgage market, so that borrowers got the best financing, the associations said.

Outlining problems the sparser liquidity is throwing up for institutional investors, the report said the new situation meant not only that sales and purchases of Danish bonds had become more expensive for the investors, but also that they now had less opportunity to change asset allocation.

“Investors are experiencing a new reality that entails them having to use significantly more resources to carry out their trades today,” the report said.

The investors also pointed out in the discussions that the biggest challenge they faced today within this sphere came when they wanted to reallocate portfolio assets

“In practice it can be impossible to implement such a reallocation within a short time period,” the report said.

Investors told the associations’ researchers that whereas 10 years ago they had been able to carry out bond trades of up to DKK1bn (€134m) within a few minutes without changing the market price significantly, today they had to limit trades to DKK100m or less in order to effect the deal within a single day without changing the market price.

The investors cited various factors that had likely led to reduced liquidity in the bond market, including the current dearth of market-makers and smaller, marginal investors in the market compared to a few years ago and the fact that bank treasury departments appeared to have become less flexible in their portfolio allocation because of stricter regulation.

The Danish Securities Dealers’ Association made a number of proposals in the report to enhance liquidity, including reducing the number of open mortgage bond series and using a higher level of central counterparty clearing as well as making changes to the law on refinancing.

Late last year, ATP cited the significant drop in market liquidity over the last 13 years as one of the factors behind the strategic changes it had been gradually making to its investment and operations.

Chief executive Carsten Stendevad said back then that the big fall in sovereign bond market liquidity since 2002 had been a huge challenge for the DKK705bn statutory pension fund.

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