Value in ARM bonds attracts buyers to Danish auctions

The opening sales of the latest Danish refinancing auctions yesterday and today achieved encouraging bid-to-covers, with market participants attributing the demand to the spreads being attractive against a range of alternatives, and FRNs sold next week are expected to be well received.

The latest Danish auction season began yesterday (Wednesday), with a total of around Dkr67bn (Eu9bn) of Danish krone bullets – the majority of which will be for one year adjustable rate mortgages (ARMs) – and around Dkr40bn of floating rate notes due to be sold.

Nykredit was first into the market, selling Dkr4.9bn of one year bullets, Dkr2bn of three years and Dkr2bn of five years yesterday. The bullets were sold with bid-to-cover ratios of 2.94, 5.53, and 3.81, respectively.

“Hence, day one provided a good indication of demand for the different maturities,” said Jan Weber Østergaard, senior analyst at Danske. “All three maturities were sold at spreads tighter than the market pricing before the auction.”

Today (Thursday), the issuer sold Dkr2bn of three year bonds and Dkr2bn of five years, with bid-to-covers of 4.44 and 3.87, respectively.

DLR Kredit started its auctions today, offering Dkr1.7bn in one year bonds, Dkr90m in two years, and Dkr550m in three years on the first day of its auctions.

Market participants said the initial sales confirmed that demand is particularly strong in three years, as had been expected, with the maturity seen as offering the best value.

The sales had been expected to go well across the curve, given limited volumes and high demand.

“Prior to these auctions, these Danish covered bonds have performed a lot, no matter what you compare them to – euro covered bonds, Danish government bonds, and versus swaps as well,” said Anders Aalund, chief analyst at Nordea Markets. “But if you compare them to all those peers, they are still relatively cheap, even in spite of this performance.

“It is therefore not surprising that in the first days of the auction they have gone so well and are continuing their performance. The orders are fairly high, reflecting that they are simply one of the last spaces in Europe where you actually have some risk premium left.”

Bankers also said that demand was high because of the scarcity of other available covered bonds during the European holiday period, and because the total volumes available in the current auction is relatively limited when compared to the amount of bonds expiring.

Aalund noted that around Dkr150bn of Danish covered bonds are expiring, while only Dkr107bn is being refinanced. He said some of these declines have taken or will take place in callables, longer-dated ARMs and floaters, while a small portion is attributable to loan repayments.

“A lot of bonds have disappeared – some of which will come after and some of which will come later – but the auction amounts are much lower than what might have been expected to be sold,” he said.

Nykredit will hold further auctions every day until next Thursday (25 August). Nykredit’s bond offering comprises Dkr40.5bn in bullet covered bonds and Dkr35.9bn in floating rate bonds.

DLR Kredit will offer Dkr5bn, with its auctions concluding tomorrow (Friday), when it will offer a further Dkr1.7bn of one years, Dkr225m of four years, and Dkr750m of five years.

BRFkredit will hold its sales from next Monday to Wednesday, offering Dkr6.3bn of ARMs across one, two and three year issues. The Jyske subsidiary will also offer Dkr4bn in a July 2019 three month FRN on Tuesday.

Nordea will hold its auctions from next Tuesday to Thursday, offering Dkr14.1bn of one to five year ARMs and Eu130m in euro-denominated one year bonds.

Realkredit Danmark will meanwhile hold investor meetings on Tuesday ahead of a Swedish krona-denominated refinancing of an outstanding bond due 1 October 2016 (ISIN DK0009291239).

Whereas the last round of auctions in May focussed on FRNs, the majority of sales in the current auctions are ARMs, with Nykredit’s and BRFkredit’s offerings next week the only floaters to be sold. Bankers expect the bonds to perform well, thanks to an attractive pick-up versus the traditional ARMs.

“The floaters for sale, which mainly have three year maturity, look quite attractive in our opinion given a pickup of around 8bp against non-callable bullets,” said Østergaard. “We expect solid demand for floaters at the auctions, as they offer value relative to short non-callable bullets even for outright investors.”

Østergaard added that liquidity in the FRNs has improved considerably in the past year.

In May, Nykredit announced plans to cut its ARMs auctions from four times to twice a year in a bid to offer fewer but larger lines of covered bonds to meet LCR Level 1B eligibility criteria, and other issuers are also working on rearranging their auctions.

“We haven’t seen any effects or pricing benefits from that yet,” said Aalund. “That will come gradually over the coming terms or years.”