Bid-to-covers up, spreads tight as Nordea, RD start auctions

Adjustable rate mortgage bonds offered by Danish mortgage credit institutions met with strong demand over the first four days of end-of-year auctions, with bid-to-cover ratios higher than recent years and spreads some 10bp tighter than market levels before the auctions.

Realkredit Danmark and Nordea Kredit have been auctioning one, three and five year adjustable rate mortgage (ARM) bonds in Danish krone since Monday, as well as one year euro bonds. Nykredit Realkredit began its auctions today (Thursday), while BRFkredit is holding tap sales.

Analysts said that the auctions have been meeting with strong interest, with spreads over Cita narrowing since the auctions began on Monday.

“The one year bonds continue to perform and spreads against Cita tightened 1bp-1.5bp,” said Christina Falch, senior analyst at Danske Bank. “Three year bonds saw a marginal spread tightening on Wednesday compared with the day before, and five year bonds had tightened 2bp and 3bp for Nordea and RD, respectively, by Wednesday.”

The average spread over Cita on Realkredit Danmark and Nordea one year ARM bonds stood at 24.7bp and 20.6bp, respectively, after yesterday’s auctions.

Bid-to-cover ratios steadily increased over the first three days of the auctions, rising from 5.76 to 6.08 in the case of Realkredit Danmark and from 4.26 to 5.40 for Nordea.

“Generally there has been quite good interest,” said Falch. “Bid to cover ratios are higher than they have been in the past.”

Sonia Khan, economist at Realkredit Danmark, said that the auctions had gotten off to a very good start, with interest rates in line with expectations.

“We are still seeing the safe haven effect,” she said. “Investors do prefer Danish and non-euro-zone covered bonds, and it’s the positive effects of that.”

Anders Aalund, chief analyst at Nordea Markets, said that ARM bonds have performed strongly over the course of the auctions, and that this showed investors have an abundance of cash to invest despite fewer bonds being auctioned.

The overall amount of Danish krone ARM bonds up for auction is less than in the past, mainly due to declining one year bond refinancing.

Spreads over Cita on one year Danish krone ARM bonds being auctioned are so far around 10bp tighter than market levels before the auctions, according to Aalund.

He noted that the spread differential between Realkredit Danmark and Nordea has tightened by around 1bp, standing at around 4bp yesterday.

“Nordea typically trades 4bp-5bp tighter than Realkredit Danmark,” he said. “You could argue the differential should be less because of the extremely low interest rate levels, but this hasn’t been the case.”

The auctions are the first to be held since Realkredit Danmark had its Capital Centre T, out of which it issues ARM bonds, cut to AA+ by Fitch at the end of October, and Aalund raised the prospect of this having an impact on pricing versus one year ARM bonds sold by Nykredit, for example, which starts its auctions on Thursday.

“Nykredit doesn’t have a Fitch rating yet,” he said. “It’s difficult to say what the rating impact is though.”