Longer bonds tighten as Nykredit passes auction halfway mark

Nykredit Realkredit is a week into its auctions and had by this (Thursday) morning allotted nearly 60% of the Danish krone bonds on offer and around 86% of a small supply of euro floaters.

Nykredit’s auctions started last Wednesday (22 August), and after seven days of offerings the issuer had by mid-morning today allotted around Dkr58.8bn (Eu7.89bn) of bonds, including floating rate SDOs and ROs, out of an offering that will comprise some Dkr102bn. Some Eu180m of euro floaters were sold at standalone auctions yesterday. Nykredit’s auctions end next Thursday (6 September).

Jacob Skinhøj, chief analyst at Nordea Markets, noted that the spreads on bonds refinancing one year adjustable rate mortgages (ARMs) have widened by around 2bp since the beginning of Nykredit’s auctions, from 33.5bp over Cita to 35.5bp over, while spreads on three year and five year bonds have tightened.

“It seems that investors are moving out along the curve,” he said. “This is probably because rates are low and they are seeking yield. The Danish mortgage bond curve has flattened in the past month or so after steepening early this year as investors seek a decent yield pick-up.”

Basel III regulations have prompted mortgage credit institutions to encourage borrowers to take out longer mortgages to reduce yearly refinancing volumes, added Skinhøj, by increasing the margin on one year ARMs.

Although the spreads on Nykredit’s longer dated bonds were expected to tighten over the course of the auction, the development has somewhat exceeded expectations, he added.

Nykredit will be joined by Nordea Kredit in auctioning mortgage bonds on 4 September, at which stage Skinhøj said spreads on one year ARM are likely to tighten again.

DLR Kredit plans to hold auctions in the period spanning 10-25 September. The issuer is waiting for Standard & Poor’s to assign ratings to its bonds before setting the exact dates, and is understood to expect that the ratings will have been assigned during the aforementioned period. DLR Kredit estimates that it will auction around Dkr11.6bn of one to five year bullet bonds in total. No euro bonds will be refinanced.

BRFkredit this week began holding sales of non-callable bullet bonds for refinancing of ARMs, with sales of around Dkr17bn expected.

Moody’s has said that best practices introduced by the Danish ministry of business and growth on Monday of last week (20 August) will, if implemented successfully, reduce the vulnerability of mortgage lenders’ loan books to credit losses as interest rates increase.

The initiative is designed to discourage mortgage lenders from providing variable rate and interest-only mortgages to financially weak borrowers, with penalties for those banks providing these products to such borrowers, according to Moody’s senior credit officer Oscar Heemskerk.

He noted that interest-only mortgages in Denmark have become increasingly popular since they were introduced in October 2003, and that increased unemployment and declining property values have raised concerns about the vulnerability of mortgage borrowers.

Some lenders have begun to address such concerns through their lending policies, added Heemskerk, with Nykredit Realkredit, for example, changing its underwriting rules so that the part of a mortgage loan that exceeds 60% of the property value has to amortise.

“The ministry’s initiative will further increase lenders’ incentives to manage this risk more carefully,” he said.