February 2, 2015 / 9:51 AM / 3 years ago

UPDATE 1-Nykredit says will not issue mortgage bonds with negative rates

(Adds quote, details)

COPENHAGEN, Feb 2 (Reuters) - Denmark's Nykredit said on Monday it would not issue new mortgage-backed bonds at negative interest rates because it is unclear how such bonds should be handled.

Recent central bank actions taking interest rates well below zero have raised the question of whether mortgage borrowers should receive interest on their loans if rates turn negative.

"The approach to negative rates is a question of fundamental mortgage industry principles. The main question is whether borrowers should get money for borrowing money," Divisional Vice President at Nykredit Sune Worm Mortensen said in a statement.

"...As the matter remains unresolved, we do not wish to issue one-year and two-year reset ARMs (adjustable rate mortgages) with negative interest rates."

Nykredit, one of the largest private bond issuers in Europe, called for a market consultation on how to handle such bonds, which help finance Danish mortgages. Yields on outstanding bonds have turned negative after a series of central bank rate cuts.

Denmark's central bank cut its deposit rate three times in January, deeper into negative territory, to -0.5 percent -- effectively charging banks to park their money securely with the central bank.

The Danish mortgage backed bond market is Europe's second biggest after Germany.

"Nykredit believes that the question of how to address negative rates is an industry challenge that should also be seen from a longer-term perspective," the lender said. "The objective must be to find a widely recognised and robust solution covering all loan types."

On top of cutting deposit rates three times in less than two weeks, the Danish central bank said on Friday it had halted new government bond sales until further notice.

Pressure had been building on Denmark's crown since the Swiss National Bank abandoned its currency cap and let the franc surge against the euro on Jan. 15. The European Central Bank's new bond-buying scheme has also helped weaken the euro broadly.

Nykredit stressed that its decision will not affect existing customers with one-year and two-year reset adjustable-rate mortgages, as negative rates are still not relevant to them because of the refinancing price spread. (Reporting by Ole Mikkelsen; Editing by Sabina Zawadzki; Editing by Catherine Evans)

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