One year ARMs supply falls despite higher rates

The volume of one year adjustable rate mortgage (ARM) bonds is set to fall again when Danish mortgage credit institutions hold their latest quarterly refinancing sales later this month, with Nykredit having yesterday (Thursday) announced a sharp reduction in its auctions of such bonds.

Nykredit Realkredit, Denmark’s biggest mortgage lender, became the first of the Danish issuers to announce details of its sales, disclosing that it will auction a total of Dkr73bn (Eu9.8bn) equivalent of ARM and floating rate bonds from 17-28 August, of which Dkr66bn will be denominated in kroner and Dkr7bn equivalent in euros.

Dkr40.7bn of Nykredit’s auctions will be of one year ARMs, down from some Dkr66bn in the corresponding sales last year, reflecting the wider trend away from the one year ARMs in Denmark. This has been driven by regulatory and rating agency pressures, with Danish lenders incentivising borrowers to move into other products.

“Some borrowers have chosen to move out of these ARMs into floating, Cita-linked bonds,” said Lars Mossing Madsen, chief dealer at Nykredit, “and some have chosen to go into 30 year mortgage bonds. So there is still a movement out of the one years into three and five year ARMs and to other longer dated products.

“The amount is more or less what we expected it to be.”

Dkr7bn of Nykredit’s sales over the 10 days will be of Cita and Euribor-linked paper, while two, three, four and five year ARM bonds will be auctioned alongside the one year ARM bonds.

Jan Weber Østergaard, senior analyst at Danske Bank, said that the move away from one year ARMs has continued more strongly than anticipated.

“We did expect the amount of one year bonds to be reduced compared with what is maturing, and this is what we are seeing, but Nykredit has succeeded in moving more one year bonds out the curve than we had initially expected,” he said. “We had seen this shift in the previous auctions, but given that interest rate levels — particularly at the long end of the yield curve — have been significantly higher in this period compared with earlier this year we didn’t expect quite so much movement.

“So we are still seeing that it is possible to move the borrowers,” added Østergaard. “It is especially Nykredit that has succeeded in moving these borrowers and reducing the amount of one year bonds — if we look at Nordea, it is only small changes that they have.”

Nordea Kredit — which announced its plans after Nykredit yesterday —will be selling some Dkr18.5bn equivalent of paper from 25-27 August, Dkr16.93bn in kroner and Eu210m in euros, of which Dkr10.5bn and Eu170m will be one years.

DLR Kredit will be active at the beginning of September, with BRFkredit also set to participate in the latest round of issuance.

Realkredit Danmark will not be joining in the sales.