‘Turmoil’ in Danish auctions as ARMs spreads widen sharply

Spreads on Danish one year ARM bonds widened by up to 10bp over the first three days of the latest refinancing auction season this week and bid-to-cover ratios hit lows, despite a sharp fall in supply, with market participants struggling to remember such turbulent conditions and understand the moves.

Worst hit were Realkredit Danmark (RD) one year ARM bonds, which, after being auctioned at 14bp over Cita on Monday on the first day of Danish auctions were sold at 17bp over on Tuesday and then 24bp over on Wednesday, before spreads stabilised today (Thursday), with RD achieving a level of 22bp over.

“I have never seen a move like that and I have been in this market for 10 years,” said an analyst in Copenhagen, who described the situation as “turmoil”.

“It’s a wake-up call for all of us.”

The bid-to-cover on RD’s one year ARM bonds fell to 1.6 on Tuesday and Nykredit Realkredit achieved only 1.53 when it began one year auctions that day. The analyst described these as “very low” and a funding official at one institution said that they were the lowest since at least 2008 and contrasted sharply with a bid-to-cover of almost 4 times achieved by Nykredit on the first day of sales in the last auction season, in August.

“Normally people put in bids very close to the end, so we were expecting to put in orders, but then they didn’t materialise,” he said. “You can imagine if we had been issuing the same amount as three months ago — it could have been quite challenging.”

The weak auctions came despite a sharp drop in supply from previous auctions and a fall in expected sales from Dkr260bn to Dkr192bn (Eu25.8bn), according to another analyst, with Danish lenders having successfully incentivised borrowers to move out of adjustable rate mortgages (ARMs) into alternative and longer dated products. Nykredit alone cut its one year ARM bond sales from an initially expected Dkr74bn to Dkr37bn.

Nykredit’s one year spread also widened, from 14bp on Tuesday to 20bp on Wednesday, while Nordea performed best, widening from 11bp to 15bp. The first analyst also noted that the divergence in spreads ran counter to a trend of recent years, and that the week’s auctions threw up what he considered to be anomalies, such as DLR Kredit trading marginally inside RD at the start of the week — “that doesn’t reflect the underlying,” he said — although today DLR was said to be 3bp-4bp wider than RD. Bid-to-covers were also higher today, with RD achieving 3.32 on its one years and Nykredit 2.76.

“It seems like there’s a good chance we are stabilising,” said the funding official.

He meanwhile noted that three and five year ARMs bonds, which had historically moved around more across auction seasons while one years remained “rock solid”, had instead shifted in parallel with the one year movements.

The analyst said that it is “extremely difficult” to interpret the reasons for the week’s activity.

“Bottom line,” he said, “things simply got too expensive.”

He noted that the Danish market had rallied alongside euros, but without the support of the European Central Bank’s third covered bond purchase programme.

However, he and other market participants also suggested that pending implementation of the Liquidity Coverage Ratio was having varied and unclear effects on the market. Some suggested that those institutions having to comply with the LCR requirement would be preferring government bonds for either regulatory or price reasons. Another said that the different performance of Nordea and RD, for example, might be explained by the different timing of implementation of LCRs for their parents in Sweden — where LCRs have already been in force — and Denmark, respectively, noting that own issues cannot be included in LCRs.

Nordea is selling Dkr29.66bn and Eu900m in total, while RD is raising Dkr58.6bn and Eu1.457bn, with both ending tomorrow (Friday). Nykredit is raising Dkr74.2bn in total until Wednesday. DLR Kredit is raising Dkr20.2bn and Eu840m to Tuesday, and then Dkr590m and Eu15m on 3 December. BRFkredit began its sales yesterday (Wednesday) and continues through to next Wednesday, selling some Dkr44.5bn of bonds.