Japan and Denmark have had friendly relations for more than 150 years, since the Treaty of Friendship, Commerce and Navigation between Japan and Denmark was signed in 1867. The chief interaction between the two countries has been commerce, with each nation among the worlds top innovators and both deeply engaged with international trade.
International trade is often measured using more industrial measures. Auto exports, manufactured goods, or agricultural commodities is what we most often talk about when we talk about international trade. But this overlooks the financial markets, which can move wealth between nations instantaneously and innovate in new and interesting ways not common to the industrial sphere.
One such value innovation that has gained significant momentum in Japan is Danish mortgage bonds. That seems like a somewhat obscure security to find popularity far from Europe in the APAC region. At first glance you might expect this wouldnt gain much ground outside of Denmark. But investors in Japan took to the mortgage bonds with a high level of interest.
Danish bonds gained momentum in 2015 with the de-linking of the Swiss Franc from the Euro and received another large inflow of foreign investors early last year, according to a Bloomberg report. When Japanese investors were inspired to sell off U.S. assets in the wake of Fed rate hikes, they turned to Danish Mortgage bonds, which are high-rated and constitute the largest covered mortgage bond market in the world, according to Bloomberg. Investing in these bonds picked up again this year as foreign investors flocked to these bonds amid market uncertainty. Danish Mortgage Bonds are the worlds largest covered bond market, with a large percentage of investors in Asia.
Pain Point
Where there has been a pain point in the market has been in determining the fair value of these bonds. Valuing the bonds has traditionally been done by finding the Net Present Value (NPV) based on the curve and cash flow of the bond. This requires an estimation of the issuer price difference, liquidity spread on mortgage bonds and cash flow. All of these are difficult to quantify and require outside intervention to set value.
Fair valuations is essential for fair trading and investing. If a portfolio manager cant assess the value of important assets in a timely fashion, important rebalancing mandates or important opportunities can be missed. Investors today need to have real-time availability in pricing, and the Danish Mortgage market is too important to investors in Japan and other parts of the world to allow this problem to fester.
Solution
An increasing demand for high-quality, independent valuation data has driven the creation of an objective valuation model.
Nasdaq offers Danish Fair Value Mortgage Bonds, which are seeing their popularity increase significantly in Japan and represent a new way to benchmark bonds.
The product uses a basket of similar bonds for valuation together with years of historical data to catch the unique price differences. The model uses this independent data as a benchmark for bond pricing. The bonds have an objective, valuation based on high quality data and a simplified structure.
This model is fully objective, and produces the high quality valuations sought by investors worldwide.
Independent Fair Value prices on Danish Mortgage and Government Bonds covering the whole market include both fixed rate bonds and floaters. At the end of the day the prices are calculated for all bonds based on marked changes throughout the day. The validity of the models has been verified by existing, trusted market participants. This is a new and unique method to price bonds.
Danish Fair Value Mortgage Bonds provide a valuable picture of price, which has been opaque. This market is too important to leave investors without a meaningful benchmark.
Trade between Europe and Asia continues to expand, and global volatility has fueled interest in the covered bond market of Denmark. With Nasdaqs contribution, trade in financial instruments between Denmark and Japan will only increase, as Danish Fair Value Mortgage Bonds provides a compelling offer for investors.
James McKeone is Head of Data for European Markets at Nasdaq.
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