The Danish central bank lowered its main interest rate to -0.75% in the beginning of February, which resulted in a halving of the Danish 10-year government bond yield this year to about 0.4% from already record lows. While this initially gave a boost to the value of their bond portfolios, Danish investors are now convinced the only way for bond yields on the medium and long term is up.
Appetite for developed market government and corporate bonds has been very low for some time, and understandably this hasn’t changed. Government bonds are the most unpopular of all asset classes, with 40% sellers, but still 10% of very contrarian bulls. The Danes are not immediately planning to sell off their corporate bonds, as these are largely foreign and thus less affected by the Danish interest rate woes. A large majority plan to keep their allocation unchanged, but many are still urgently looking for higher-yielding fixed income.
Some Danes are looking to find these higher yields in high yield bonds. Almost 1 in 4 of interviewees plan to increase their exposure to the asset class, and Denmark is only one of two European countries where buyers and sellers balance each other out.
What’s the alternative?
Across Europe, absolute return funds have been a very popular alternative to fixed income, with investors steadily adding more of it to their portfolios. But that’s not the case in Denmark, where a majority of investors still don’t use the asset class. Together with the Netherlands and Norway, Denmark is the only country where absolute return is not a hit. Only the occasional bond investor is considering a long/short option, and it’s even harder to find fans of long/short equity products.
So if they are not using absolute return, where are the Danes looking for yield instead? The answer lies partly in the fact that Denmark is a country of institutional investors, which do not require highly liquid investments. So several pension fund investors told our researcher they want to increase their exposure to real estate, private equity and infrastructure. Investors also ponder to add structured bank loans, where they expect to find illiquidity premiums, to their bond mix.
