August 22, 2016 / 4:16 PM / a year ago

Low liquidity seen threatening Danish bond market -report

COPENHAGEN, Aug 22 (Reuters) - Shrinking liquidity and oversupply is threatening the stability of the Danish mortgage bond market, Europe's second largest, a report said, potentially hurting Denmark's companies and homeowners many of whom rely on the cheap loans.

Denmark's 2.79 trillion Danish crowns ($423.5 billion) mortgage bond market is four times larger than government bond market and an important part of Danish economy. Banks use the bonds as part of required liquidity reserves.

A key problem is the high number of open series of covered bonds - around 440 which is about 10 times more than in neighbouring Sweden, according to a report by The Danish Securities Dealers Association published on Monday.

Five major Danish institutional investors surveyed for the report said lower liquidity has made it more difficult to buy and sell mortgage bonds compared to 10 years ago, and the impact on bond prices when placing an investment was bigger today.

Finding ready buyers and sellers of debt from Western companies and emerging markets, especially with higher risk, had also become more difficult amid stricter banking regulation since 2008 and a low interest rate environment.

At the same time it had become less attractive for banks to be market makers by facilitating trading by holding securities on their own books and displaying bids and offers.

Data from the Danish central bank showed the banks holding of mortgage bonds for use of their market makers has been reduced to around 130 billion crowns in 2015 from 230 billion crowns in 2014.

The liquid Danish mortgage bond market hasn't seen a single default in its 200-year history, but more regulation followed by financial crises has made banks more reluctant to hold covered bonds.

$1 = 6.5882 Danish crowns Reporting by Ole Mikkelsen; Editing by Raissa Kasolowsky

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