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Denmark's Currency Loses Appeal for Biggest Commercial Fund

(Bloomberg) — The return on krone-denominated assets is now so low that Denmark’s biggest commercial fund no longer finds them attractive.

Central bank efforts to prevent the krone strengthening beyond the limits of its peg to the euro have forced it to cut interest rates four times this year and deliver record currency-market interventions. The key deposit rate is minus 0.75 percent, matching Switzerland’s, and foreign reserves are equivalent to more than 35 percent of gross domestic product. Yields on government bonds as long as five years are negative and Denmark has suspended debt auctions to reduce supply and keep investors out.

“Danish assets have been so suppressed that the only other place that provides an equally poor return would be Switzerland,” Poul Kobberup, chief investment officer at PFA Pension A/S, said in a phone interview. “There are other markets with steeper rate curves that provide much more attractive returns. One such place would be the U.S., another the U.K. and even Sweden.”

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According to Nordea Bank AB, Scandinavia’s largest lender, it’s still too early to say whether pressure on the krone has abated. Net flow data due to be published by the central bank at 4 p.m. in Copenhagen will be key in shedding light on the matter, Nordea said. The bank estimates currency-market interventions since the middle of January have exceeded 275 billion kroner ($ 42 billion).

After trading weaker earlier on Tuesday, 12-month forward rates on the krone jumped 0.2 percent to 7.415 as of 10 a.m. local time. The krone gained 0.08 percent against the euro to 7.4547, according to spot data compiled by Bloomberg.

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Rohde’s Battle

The development suggests that central bank Governor Lars Rohde has succeeded in deterring investors from hoarding kroner after a five-week-long battle to defend Denmark’s euro peg. Demand for AAA-rated krone assets soared after the Swiss National Bank on Jan. 15 abandoned the franc’s cap to the euro. That move fanned conjecture Denmark’s ties to the euro may also be unsustainable.

Rohde’s historic package of measures has since driven down yields on Danish bonds, which are now the lowest in the developed world, after Switzerland. Denmark’s 10-year yield was about 0.3 percent on Monday, its five-year yield was minus 0.2 percent and its two-year yield was minus 0.6 percent, according to data compiled by Bloomberg.

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PFA’s liabilities are krone-denominated, and the fund isn’t free to shift its investments in a way that would create a mismatch between the currencies of its assets and liabilities. At the end of 2013, PFA had assets under management worth about 400 billion kroner ($ 60 billion).

Haven Assets

“We keep a stable currency exposure so there’s a limit to how much we can move around,” Kobberup said. “We can only shift about a couple of percent of our portfolio.”

The past month and a half has tested Denmark’s monetary toolbox as Rohde navigated his way through a barrage of market shocks, from Switzerland’s decision to send the franc into a free float to the European Central Bank’s unprecedented quantitative easing program. Efforts to reach an agreement on a bailout extension for the Greek government have also jolted markets, with a tentative deal reducing the appeal of AAA-rated assets.

The Swiss franc lost about 1 percent against the euro on Monday as the currency’s haven appeal faded and investors turned to higher-yielding assets.

“Greece’s debt problem may not be over,” said Jane Foley, a senior currency strategist at Rabobank International in London. “But at least the deal they’ve got over the weekend will distract the market from haven assets.”

To contact the reporter on this story: Peter Levring in Copenhagen at [email protected]

To contact the editors responsible for this story: Tasneem Hanfi Brogger at [email protected] Christian Wienberg

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