Danish mortgage market hit by duration extension, still expected to worsen?

The increase in rates since late April has hit the Danish fixed income market severely. 

The negative convexity in the callable bond market combined with the increase in rates has once again shown that it can be dangerous. Spread on bonds have widened as risk has been growing.

Further rate increases from now on will however hit the market less severely, as much of the negative convexity is gone, and the drop in prices means that a scenario of borrower buyback is moving closer. Recent days spread compression is also seen, which is indicating that market sentiment is getting more positive, says Nordea.