The bank, DNB, like its home country, has experienced a rush of money from American investors looking for safety while they wait out the debt crisis in Europe and slowing economic growth in America and China. Just about every day, the front desk receptionist at DNB takes cold calls from investors wanting to buy Norway’s bonds or some other asset tied to Scandinavia’s healthy economy.
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Employees work on the trading floor of DnB Nor ASA at the company's headquarters in Oslo, Norway.
“A few years ago, these people wouldn’t have known where Norway was on the world map,” said Clifford Queen, a DNB bond trader in New York.
Government bonds issued by the United States, Germany and Japan are still the primary havens for scared investors around the globe. The demand has pushed down the interest rate on the 10-year United States Treasury bond to record lows around 1.5 percent. But investors have begun to worry about holding too many Treasury bonds as other safe alternatives dwindle as a result of the economic troubles sweeping the globe. This has led many investors to places that used to be on the fringes of the investing world like Norway, Sweden, Canada and Australia.
These countries offer little of the risk, or the outsize returns, that were so alluring to investors before the financial crisis. But now that fear is the main motivator — strategists call it seeking a return of equity instead of a return on equity — healthy government finances are a powerful magnet for money.
“It is getting harder to find safe assets,” said David Nagle, who helps manage money for insurance companies at Babson Capital . “We didn’t need to dig as deep a few years ago to uncover these things. But now you are scraping around for everything you can find.”
The search for investments that carry little to no risk of default has become a dominant theme driving flows of money around the world. It kicked in a few years ago when top-rated United States mortgage bonds blew up in the financial crisis, and it has intensified recently as the economic future of European countries that used to be viewed as safe investments has been thrown into question.
Foreign investors have fled from the bonds of countries like Italy and Spain, pushing up the cost of borrowing for those governments. Even those European countries with the strongest economies, like Germany, have become less attractive because of their exposure to the possible breakup of the euro currency.
Investors have instead sought out government bonds from Sweden, Finland and Norway, where rates have hit record lows this summer. Last week, while rates on Spain’s 10-year debt ranged from 6.5 to 7.5 percent, Norway’s hovered around 1.8 percent. In Norway, 70 percent of the outstanding government bonds are in foreign hands, up from 50 percent three years ago, according to Erica Blomgren, the chief strategist in Norway for the Swedish bank SEB.
The rush of money can pose serious problems. In Canada, the cheap money available to the nation’s banks has made it easier for people to get mortgages, pushing up home prices and raising concerns about a housing bubble. The Canadian government has responded by repeatedly tightening rules on mortgage lending, most recently in June, when the maximum term of mortgages was shortened to 25 years from 30.
Household debt in Norway has also risen recently, driving home prices to levels that some analysts have said are unsustainable. Unlike central banks elsewhere in Europe, which are pushing interest rates down to help encourage economic growth, Norway’s central bank cautioned in a June report that it will most likely begin increasing interest rates next year.
The influx of foreign money has also pushed up the value of currencies like the Norwegian krone, making exports less attractive and angering manufacturing companies. The central bank in Switzerland, another popular safe haven, has been aggressive in holding down the value of the franc by using its reserves to buy other currencies.
Clamor for safe assets is coming from investors of all stripes. Individuals and businesses in America have been depositing more of their cash in federally insured bank accounts. The banks, in turn, have had to find safe places to invest what they do not lend, and they have been competing against other money managers, like mutual funds and insurance companies, looking to do the same thing.
Money market mutual funds, which invest in safe, short-term debt, have an inside view on this search for safe assets because of regulations that restrict them to the highest-quality assets.
David Glocke, a portfolio manager for Vanguard’s money market funds, said that since the financial crisis he has had to cross a growing number of possible investments off his list because of the European crisis. While he used to provide very short term loans to banks across Europe, he has stopped lending to companies even in countries with the euro zone’s strongest economies, like Germany and the Netherlands.
“It’s a challenge to manage the portfolio in an environment where there are fewer names to invest in,” Mr. Glocke said.
Mr. Glocke has responded by putting over half of the money market funds’ money into short-term Treasury bonds, up from 28 percent in 2009. He has also added Australian and Canadian banks to the list of places where he will invest.
Money market fund managers around the world have found relative certainty in the government bonds of Germany, Japan and Britain, which all have interest rates on 10-year bonds that are near or below the rock-bottom United States yields. But many institutional investors have voiced concerns that the interest rates on these bonds have gone too low, particularly given the budgetary problems in the United States and Britain and Germany’s exposure to the euro.
The interest this has generated in smaller countries is evident from the short-term loans that have gone to companies like the Bank of Nova Scotia. The bank is Canada’s third-largest, but it recently overtook both JPMorgan Chase and Citibank to become the ninth-largest recipient of loans from money market funds, according to May figures from Crane Data. Canadian banks have been so attractive in part because of their good performance during the financial crisis.
“As long as global investors are worrying about the possibility of a renewed systemic banking crisis, it makes infinite sense that they would have a more positive feeling about financial systems that went through the 2008 crisis well,” said Craig Alexander, the chief economist at Toronto-Dominion Bank.
More broadly, American money market funds took $17 billion out of German banks and $19 billion out of the Netherlands in June, at the same time that the funds were putting $5 billion into Norwegian banks and $9 billion into Swedish ones, according to data from a J. P. Morgan analyst, Alex Roever.
Still, investments in Canada and Scandinavian countries are far from perfect replacements for Italian and Spanish bonds. The new safe havens are harder to trade into and out of during times of crisis because there are fewer outstanding bonds and less trading than in huge markets like that for United States Treasury bonds.
But the attraction of Norwegian bonds in uncertain times is not hard to understand. Norway’s unemployment rate hovers around 3 percent and the country is one of the few in the world with a budget surplus. If the government did ever run into trouble paying back bondholders, it could presumably tap some of the country’s immense oil resources. All of this has led investors buying insurance on government bonds to rate Norway as the safest bet in the world.
To give investors a way to buy into this safety, DNB has invented new kinds of Norwegian bonds for foreigners, including so-called covered bonds, which are backed by Norwegian mortgages. These were first made available in the United States in 2010, and $10 billion of them have already been sold. This year, the bank began placing its own bonds privately with American investors, raising $10 billion this way.
DNB’s New York offices are dotted with signs of construction as the company expands its offices to make room for the roughly 30 new employees it has brought on in the last few years to deal with the new activity — a 40 percent expansion. Kristian Ottosen, a bond trader, said that the company had been hiring from competitors forced by the risk-averse climate to scale back.
“We can actually afford to staff up when everyone else is struggling with the euro crisis and American mortgages,” Mr. Ottosen said.