Danish Mortgage Bonds
Nykredit Asset Management’s strategy in Danish mortgage bonds is to exploit the enormously wide range of bonds in the Danish market.
In general terms Danish bonds is a complicated asset class. There is a traditional segment of government bonds but also a much larger segment of mortgage bonds. Many Danish mortgage bonds contain various option elements, and in a relative value strategy it is of the utmost importance to value these options correctly. In order to do that, you need to take borrower-behaviour into account, and also market elements such as actual and preliminary prepayment and issuance, opening and closing of series on tap, introductions of new refinancing opportunities, and of course the development of the term structure and its volatility.
Since many of the Danish liquid and solid bonds are complicated, we think it is credible that you can obtain systematic excess returns by precise and ongoing analysis of the bonds, and by constantly attempting to improve the analysis precision. We try to do this by combining quantitative improvements of existing mortgage bond models with a qualitative assessment of when and how issuance and prepayment patterns appear to deviate from history. The purpose of the qualitative assessment is to capture situations where the common and corrected models risk giving wrong figures.
It is our ambition to create value by trading among market segments and single bonds. By identifying relatively cheap and expensive bonds, and strict duration management, we strive to create excess returns.