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Three Reasons the Eurozone's Investors Love Danish Bonds


Why do the eurozone investors love Denmark's bonds so much that they are willing to lock in negative yields for two to three years?

Would you pay Denmark's government 0.6% to hold your money for two years? Sounds strange, but that's exactly what investors are now doing. Denmark's government paper yields just hit new lows. And it's not only the short-term bills with the negative yield (short term bills sometimes go negative when investors seek immediate liquidity). The 2 and 3-year notes are now also comfortably in the negative territory as the eurozone's investors simply can't get enough.

Denmark's 2 and 3-year government yields

Why do the eurozone investors love Demark's bonds so much that they are willing to lock in negative yields for two to three years? Here are three key reasons:

1. Eurozone based investors are not taking much FX risk because Denmark keeps EUR-DKK exchange rate tightly pegged.

DKK per 1 euro

2. Investors love Denmark's economic fundamentals, particularly the relatively low government debt and deficit.

Source: Bloomberg/BW

3. Keeping funds outside the eurozone may provide a hedge against potential problems associated with the monetary union's stability. From Bloomberg/BW (emphasis mine):

If the euro crisis worsens, foreign capital may keep pouring in, negative rates or no. Says Ian Stannard, chief European currency strategist at Morgan Stanley in London: "For an international investor with euro zone exposure, buying Danish assets can be a hedge against the extreme scenario of the euro breaking up."

Twitter: @SoberLook
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