Fixed Income

Sparinvest offers several funds investing in Danish government bonds and covered bonds. The funds represent various risk levels and may be selected or combined to pinpoint your risk tolerance and investment horizon.

The fund Danske Obligationer explained

Sparinvest offers funds with short-, medium- and long-dated Danish bonds where interest rate risk is the primary risk exposure. The fund's returns will therefore depend on the movements in Danish government and covered bond yields. The interest rate risk is also referred to as duration, which is a measure of a bond's sensitivity to interest rate changes. Each of the Danish fixed income funds have a fixed duration range. The higher a bond's duration, the greater its price sensitivity, and therefore returns will fluctuate concurrently with interest rates increase or decrease. The duration of the individual funds will always remain within the fixed range and is otherwise very stable. The duration of the fund Korte obligationer (short-dated bonds) is around 2.5, of the fund Mellemlange obligationer (medium-dated bonds) around 4.5 and of the fund Lange obligationer (long-dated bonds) around 6.25.

Additional return potential of Danish covered bonds

Denmark's mortgage market is unique because of its many different loan types and the match funding principle where bonds issued in the bond market to fund mortgage loans must have the same characteristics as the underlying loan. The Danish mortgage market is one of the largest, oldest and best regulated mortgage markets in the world. This gives investors in the Danish bond market both attractive return and portfolio diversification opportunities.

When bond funds invest in covered bonds, in addition to interest rate risk, they become exposed to spread risk, ie the risk that the yield spread between government and covered bonds widen or tighten when mortgage rates move differently than government bond rates. Investments specifically in callable covered bonds will expose the fund to prepayment risk, as the borrower may opt to refinance (prepay) the underlying loan. However, the borrower pays a higher interest rate for this prepayment option, often rewarded by higher returns to the investor for assuming such risk.

Sparinvest regularly evaluates the return potential of assuming spread and prepayment risk, and we will accept a higher risk at the prospect of high rewards and thus an attractive return potential. But we always maintain a basic exposure to Danish covered bonds, as they generally offer a higher yield than corresponding government bonds.