Nykredit finds strong demand in opening ARMs offering

Nykredit Realkredit kicked off autumn refinancing auctions in Denmark today (Thursday), with “extraordinarily high” interest coming in for its offering of one year ARM bonds, according to an official at the issuer, although an analyst said the outcome was not surprising.

Nykredit is due to offer some Dkr77bn (Eu10bn) of one year bonds over the course of its auctions, which finish on 29 August. The issuer wrapped up the first auctions with allocations at 1140 CET today.

Lars Mossing Madsen, chief dealer at Nykredit Realkredit, said that the first day of the mortgage bank’s auctions went “extremely well”. The bid-to-cover was 3.44 and the spread to Cita 17.7bp, which Madsen noted is considerably tighter than what some analysts had expected, namely a spread in the 20bp over area.

“The interest is extraordinarily high so the spread definitely tightened compared to the secondary market,” he said. “With the high bid-to-cover we saw it seems like the strong interest will continue.”

Anders Aalund, chief analyst at Nordea Markets, said that the outcome of Nykredit’s auctions is in line with his expectations, and that he believes levels can tighten further.

He put the spread over Cita at 19.5bp, noting that the spreads cited by market participants differ depending on where they pinpoint Cita, on a spot or forward basis. The 19.5bp over is a forward quote, he said.

“One year bonds are a perfect match for bank treasuries — they are short dated, of high credit quality and provide a pick-up, but there is a trend against them and fewer and fewer are being sold,” said Aalund, citing the introduction of new Cita-based mortgage products as an alternative to one year ARM bonds.

Danish mortgage banks have been under pressure to reduce the volume of loans with annual interest rate adjustments, and in addition to trying to encourage borrowers to take out loans with longer refinancing periods they have also been working on new mortgage products to address concerns about refinancing risk in the Danish mortgage system.

Realkredit Danmark on 1 August officially announced plans to launch a new product based on the Cita rate, and Aalund said that other mortgage banks are exploring whether to make a similar move.

Realkredit’s new Cita loan is due to be based on six month Cita fixings but have a three year maturity, and the issuer is pitching these as an alternative to one year and two year ARM bonds.

Danske Bank analysts said that other Danish mortgage banks have shown “mixed reactions” to Realkredit Danmark’s announcement of a Cita mortgage product and that it remains to be seen whether they emulate its initiative to take a different path.

They note that mortgage banks offering Cibor-based loan products are compelled to launch Cita-based alternatives by the end of the year, according to an agreement with the Danish Ministry of Business & Growth, but that alternatives need not be marketed as an alternative to short term ARMs.

“Relative to a one year ARM, there is only a marginal difference in mortgage payments,” said the analysts about Realkredit Danmark’s three year Cita mortgage loan. “It would probably take a financial incentive for borrowers to opt for the new loan product.”

BRFkredit and DLR Kredit announced details of their upcoming auctions yesterday (Wednesday). BRFkredit is holding sales of ARM bonds from 26-30 August, the bulk of which will be for one year SDOs (Dkr9.7bn). The next largest offering is expected to be Dkr4.2bn of five year bonds.

DLR Kredit will auction one year Danish krone denominated ARM bonds on 3-5 September, offering Dkr5.5bn on each day for a total offering of Dkr16.5bn.

It will also be auctioning two to five year Danish krone denominated ARM bonds during that period, the majority of which will be three year SDOs (Dkr340m).