ARMs auctions recover after yields back up on Danish krone nerves

The start of the first Danish auction season to include sales of adjustable rate mortgage (ARM) bonds at negative yields was hit by nervousness about the Danish currency and interest rates on Monday, with yields backing up more than 30bp, but levels and bit-to-covers improved from Tuesday onwards.

In the run-up to the sales the Danish central bank, Danmarks Nationalbank, cut its key interest rate to a record low of minus 0.75% to counter upward pressure on the Danish currency and yields on ARMs bonds entered minus territory.

However, on Friday the Danish krone fell to its cheapest level year-to-date, Dkr7.46/Eu, and market participants said that this was accompanied by questions over how long the central bank’s defensive interest rate policy would continue.

The result was a back-up in yields on one year ARM bonds of some 30bp-40bp when auctions began on Monday, according to the analyst, with levels deteriorating through the day. Nykredit Realkredit sold one year ARMs almost 10bp wider than where Realkredit Danmark (RD) had auctioned its paper shortly earlier, for example, with the instrument hitting a yield wide of minus 0.05% — although at this level Nykredit achieved a bid-to-cover of 2.86 versus 1.53 for RD’s sale.

“All in all it has been a complicated day to have the auctions, to be honest,” said a funding official on Monday. “You have all this uncertainty with the krone. I would say that interest on the first day has been limited.”

However, on Tuesday — when Nordea Kredit joined the auctions — bid-to-covers improved sharply and yields became more negative again, although not to the levels that preceded the sales. Nykredit one year ARMs, for example, were at minus 0.16% on Tuesday and minus 0.21% Wednesday.

“There was a nervousness about the krone on Monday but afterwards that disappeared,” said Lars Mossing Madsen, chief dealer at Nykredit, which sold the most bonds this week. “There was huge interest in our bonds on Tuesday, Wednesday, Thursday. It completely turned around.

The issuer’s bid-to-cover for its one year ARMs was 3.76 on Tuesday, 3.66 on Wednesday and 3.64 on Thursday.

“On average interest has been bigger than in the last auction seasons,” added Madsen.

Anders Aalund, chief analyst at Nordea Markets, said that investors realised that the back-up on Monday had been overdone.

“After Dkr275bn of intervention from the central bank there was one day when things started to cool off, with marginal outflows from the currency, and people got scared about buying a one year bond at such low rates,” he said. “But then they started thinking: this is not the end — we will not have a normalisation in the next month or two.

“People did the maths and saw that it was simply too good not to buy.”

He added that apart from some Dkr20bn of supply from Nykredit in May, there will not be further one year ARMs auctions for six months.

The one year ARMs sales were the biggest component of sales this week across a variety of maturities and instruments, with some Dkr157bn and Eu1.545bn on offer in the two currencies. DLR Kredit will hold sales next week, but the other issuers, including BRFkredit, are finishing this week.