Copenhagen Stock Exchange - Focus: Strong Interest In 2% Bonds Among Danish Bond Investors In Search Of Excess Return

The continued fall in interest rates has led to a dramatic decline in the net return on Danish government bonds. For example, investors buying Danish government bonds, such as the 7% 2004 or the 8% 2006, and holding them to maturity will receive a negative net return (at a tax rate of 45%). This negative return is the result of the high price level of the bonds (well above par) as a result of the high coupon rate. Consequently, investors now look to 2% bonds in search of excess return in the Danish bond market. Thus writes Jens Peter Sørensen, Danske Bank, in Focus no. 56.

Historically low interest rates now allow issuers to market 2% bonds, and Danish Ship Finance, KommuneKredit, DLR and BRF have issued corporate and mortgage bonds in several segments.

The author expects investors, and especially private investors, to maintain their solid interest in the 2% corporate and mortgage bonds, since the capital gain on bonds with coupons matching the minimum coupon rate or higher are not taxable. Quite a few investors are likely to sell off 3% bonds and place the funds received in 2% corporate bonds. The capital gain will be higher if the bonds are held to maturity compared with the return on government and other mortgage bonds.

Read the article "Strong interest in 2% bonds among Danish bond investors in search of excess return", which also focuses on the Danish Emu debate and the narrow yield spread to Germany, in Focus no. 56 at the Copenhagen Stock Exchange's website www.cse.dk.

Questions to the author may be sent to the e-mail address: info@cse.dk until 10 July 2003.