In recent weeks, interest rates have generally risen in Europe and thus also in Denmark. This has negatively affected the bond portfolios in the short run. In the future, however, the return will be improved precisely as a result of the higher interest rate level.
In recent weeks, wealth management has received inquiries from investors who have asked for the sudden increase in interest rates and the resulting negative returns on the bond portfolios. However, even though interest rate hikes, which also hit medium-term mortgage bonds, had a negative impact on the return in the short term, the difference between the loan interest rate and the investment rate has actually improved over the past few weeks, which means that the forward-looking return potential has increased.
Two reasons for price falls
There are two reasons why bond portfolios have been affected by the current interest rate increases/fall in prices. Firstly, the long-term interest rate has risen, which has also raised the interest rate on the medium-term bonds – not as much as they are long-term, but enough to give a negative effect. On the other hand, long-term Danish mortgage bonds have been hit harder relatively speaking. However, since the peak of the interest rate increase in early May, these effects have slowed down slowly.
Property management’s overall interest rate strategy, as determined by the Investment Committee, has been and still is that the bond portfolios must be protected against interest rate increases in the long-term interest rate. Therefore, the portfolios are primarily invested in mortgage bonds with a maturity of between three and five years. These bonds are sensitive to interest rate changes in the short and medium-term interest rates. Here, wealth management believes that potential interest rate increases will remain at a low level for the next couple of years, partly as a result of the European Central Bank’s easing monetary policy.
Property management has deliberately kept a relatively low-interest rate sensitivity in the bond portfolio with hedging of the interest rate risk on long-term interest rates through financial instruments. These financial instruments have proven their worth during the recent turmoil and have neutralized the current interest rate increase in terms of long-term interest rates, but not the increase in short and medium-term interest rates.