The Danish Council for Return Expectations has raised its return expectations for government, mortgage, and investment-grade bonds for the first half of 2027, following significant increases in global interest rates.

The latest projections showed that while higher interest rates boosted expected bond returns across investment horizons, expectations for most other asset classes declined in the short term, with a more mixed outlook over the medium and long term.

The council attributed the interest rate increase partly to higher energy prices, inflation and uncertainty about future inflation, along with rising government borrowing requirements and international public debt

Danish Council for Return Expectations chair and Copenhagen Business School professor, Jesper Rangvid, explained: "The interest rate increases reflect, among other things, higher energy prices and inflation, as well as increased uncertainty about expected future inflation.

"At the same time, interest rates have increased internationally, among other things as a result of greater public financing needs and growing public debt."

Rangvid added that while higher interest rates improved expected bond returns, the outlook for other asset classes remained more uncertain, reinforcing the importance of considering investment risks alongside expected returns.

Following the rise in interest rates since 30 June 2026, the council adjusted one-to-five-year return expectations for government, mortgage, and investment-grade bonds upward by 0.28 percentage points, compared with the forecasts originally submitted by financial institutions at the end of June.

Meanwhile, long-term return expectations for equities, bonds and illiquid assets, covering investment horizons of more than 10 years, remained unchanged from the first half of 2026.

The council also maintained its inflation expectations, based on a consensus of forecasts from Danish government bodies, the central bank, and major financial institutions.

In addition, it announced it would begin examining how to incorporate climate-related and other long-term risks into future return expectations, following a conference held in collaboration with research centre PeRCent.

For the first time, the council has also published expectations for funding costs, reflecting the increasing use of leverage within pension investment portfolios.

The new projections estimate the cost of borrowing to finance investments and are intended to improve pension forecasts by providing a more comprehensive assessment of expected returns from leveraged portfolios.

Short- and medium-term funding cost expectations are based on overnight indexed swap (OIS) forward rates and a risk premium, while longer-term estimates draw on historical differences between short- and long-term interest rates.

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