DANMARKS NATIONALBANK LIQUIDITY IN THE DANISH MORTGAGE BOND MARKET - - PowerPoint PPT Presentation

DANMARKS NATIONALBANK

LIQUIDITY IN THE DANISH MORTGAGE BOND MARKET

​CCBS Workshop for Heads of Financial Stability 23 February 2016, Peter Ejler Storgaard

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Market liquidity in focus

• International focus on development of

market liquidity

• Decline and/or less resilient?
• Causes?
• Changing market structures?
• New regulation?
• In Denmark
• Mortgage bonds are central in

Danish credit market

• Liquidity in this market important for

financial stability

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Credit intermediation in Denmark

Source: Danmarks Nationalbank, third quarter 2015

Mortgage banks Banks Other credit intermediation

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Key questions and analytical framework

​Key questions:

• Has market liquidity of Danish mortgage

bonds declined?

• How does the Danish market structure

affect liquidity? Analysis:

• Estimation of liquidity measures
• Based on MiFID transaction reports
• Supplemented by working group with

market participants

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​ ​ A quick overview of the Danish mortgage bond market

​ But still a large number of small series

​Source: Danmarks Nationalbank and own calculations

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​Outstanding volume concentrated in ​large series

500 1,000 1,500 2,000 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Series < 500 million euro Series > 500 million euro

Number of securities Outstanding volume

500 1,000 1,500 2,000 2,500 3,000 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Series < 500 million euro Series > 500 million euro

• Kr. billion

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Refinancing risk and turnover

​Refinancing auctions has been spread out

​Source: Danmarks Nationalbank and MiFID transaction reports

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​Maturities of outstanding volume has increased in recent years

500 1,000 1,500 2,000 2,500 3,000 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 < 1 year 1-5 years 5-20 years > 20 years

• Kr. billion

Remaining maturity of outstanding volume Turnover

400 800 1,200 1,600 2,000

• Kr. billion

08 09 10 11 12 13 14 15

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Liquidity measure stable over time – but volatility has increased from 2014

​Price impact of trades

​Source: MiFID transaction reports

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Price impact of trades across maturities

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​Source: MiFID transaction reports

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Liquidity across series volumes

​Small difference in liquidity between small and large series

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​No significant decrease in turnover

0.00 0.02 0.04 0.06 0.08 0.10 0.12 Series < 500 million euro Series > 500 million euro Per cent of market value 08 09 10 11 12 13 14 15 10 20 30 40 50 60 08 09 10 11 12 13 14 15 Series < 500 million euro Series > 500 million euro

• Kr. billion

Average monthly turnover

​Source: MiFID transaction reports

Price impact of trades

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Lower liquidity in the smallest series of all

​Source: MiFID transaction reports

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​Cross-section of 1-year bonds

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Premium on small bond series

​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

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Banks are reducing market making

​ Source: Chart to the left : Danmarks Nationalbank, ​Chart to the right: Danske Bank, Jyske Bank, Nordea Bank Danmark, Nykredit Bank, Sydbank.

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​Turnover in repo market is decreasing ​Sharp decline in banks market making inventories

5 10 15 20 25 Unsecured Secured

• Kr. billion

2008 2009 2010 2011 2012 2013 2014 2015 100 120 140 160 180 200 220 240 260

• Kr. billion

2013 2014 2015

Average monthly turnover Banks inventory of mortgage bonds for market making purposes

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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
• Banks reduce market making inventories
• 24. marts 2016

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