DANMARKS NATIONALBANK LIQUIDITY IN THE DANISH MORTGAGE BOND MARKET CCBS Workshop for Heads of Financial Stability 23 February 2016, Peter Ejler Storgaard
ed Market liquidity in focus Credit intermediation in Denmark • International focus on development of market liquidity • • Decline and/or less resilient? • • • • Causes? • Changing market structures? • New regulation? dsk • In Denmark • Mortgage bonds are central in Danish credit market Mortgage banks • Liquidity in this market important for Banks Other credit intermediation financial stability Source: Danmarks Nationalbank, third quarter 2015 2
ed Key questions and analytical framework Key questions: • Has market liquidity of Danish mortgage • bonds declined? • • • • How does the Danish market structure affect liquidity? Analysis: dsk • Estimation of liquidity measures • Based on MiFID transaction reports • Supplemented by working group with market participants 3
A quick overview of the Danish mortgage bond market Outstanding volume concentrated in But still a large number of small series large series • Outstanding volume • Kr. billion Number of securities • • 3,000 2,000 2,500 1,500 2,000 1,500 1,000 dsk 1,000 500 500 0 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Series < 500 million euro Series > 500 million euro Series < 500 million euro Series > 500 million euro Source: Danmarks Nationalbank and own calculations 4
Refinancing risk and turnover Maturities of outstanding volume has Refinancing auctions has been spread out increased in recent years • Remaining maturity of outstanding volume Turnover • Kr. billion Kr. billion • 3,000 2,000 • 2,500 1,600 2,000 1,200 1,500 800 dsk 1,000 400 500 0 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 08 09 10 11 12 13 14 15 < 1 year 1-5 years 5-20 years > 20 years Source: Danmarks Nationalbank and MiFID transaction reports 5
Liquidity measure stable over time – but volatility has increased from 2014 Price impact of trades • • • • dsk Source: MiFID transaction reports 6
Price impact of trades across maturities • • • • dsk Source: MiFID transaction reports 7
Liquidity across series volumes No significant decrease in turnover Small difference in liquidity between small and large series Price impact of trades Average monthly turnover • • Per cent of market value • Kr. billion • 60 0.12 50 0.10 40 0.08 30 0.06 dsk 20 0.04 10 0.02 0 0.00 08 09 10 11 12 13 14 15 08 09 10 11 12 13 14 15 Series < 500 million euro Series > 500 million euro Series < 500 million euro Series > 500 million euro Source: MiFID transaction reports 8
Lower liquidity in the smallest series of all Cross-section of 1-year bonds • • • • dsk Source: MiFID transaction reports 9
Premium on small bond series • • • • dsk Note: The chart shows the effective interest rate on five Realkredit Danmark issuances of SDROs at refinancing auctions in the period 17-18 November 2015. Source: Realkredit Danmark og Nykredit Markets 10
Banks are reducing market making Turnover in repo market is decreasing Sharp decline in banks market making inventories Average monthly turnover Banks inventory of mortgage bonds for market • • making purposes • Kr. billion Kr. billion • 25 260 240 20 220 200 15 180 dsk 10 160 140 5 120 100 0 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 Unsecured Secured Source: Chart to the left : Danmarks Nationalbank, Chart to the right: Danske Bank, Jyske Bank, Nordea Bank Danmark, Nykredit Bank, Sydbank. 11
Main conclusions • The overall level of liquidity in the Danish mortgage bond market is still high, but volatility seems to have increased. • Liquidity is slightly lower in smaller bond series, but has not decreased in recent years. • • • • • It cannot be excluded that execution of trades has become more time-consuming. • Decline in market support of liquidity? • Decreasing turnover in repo markets dsk • Banks reduce market making inventories 24. marts 2016 12
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