The Danish covered bond auction season started on Monday with Realkredit Danmark kicking off its Dkr140bn (Eu19bn) in Danish kroner and Eu4bn (Dkr30bn) of euro sales at a lower yield and higher bid-to-cover than anticipated in euros, but slightly wider spread in Danish kroner.

Jacob Skinhøj

The euro bonds were sold at a yield of 1.1% and Jens Peter Sorensen, chief analyst at Danske Bank (Realkredit Danmark’s parent) said that, at 63bp over Eonia, the paper offers a nice pick-up to investors.

“When the ECB cuts rates, the investor stands to gain,” he said, “so there is a good strategy for buying these.”

Lars Mossing Madsen, first vice president at Nykredit, said the reason for the strong interest may be a result of a lack of euro issuance recently.

“There hasn’t been much euro issuance in the last couple of months given that it was more attractive to issue in Danish krone,” he said. “We didn’t know how much interest there was in euro market.”

Nykredit group, comprising Nykredit Realkredit and Totalkredit, will enter the market on 29 November for a total of Dkr136bn (Eu18.3bn), including the equivalent of Dkr42bn (Eu3bn) in euro denominated notes.

“The euro bonds went at an expensive level and the Danish krone bonds went cheap,” said Jacob Skinhøj, chief analyst at Nordea Markets.

Market participants in Denmark had been expecting the Danish krone bonds to trade at between 45bp-50bp over mid-swaps, but Realkredit Danmark’s bonds have been trading at 53bp-54bp over mid-swaps.

“We believe the spread might widen a little more, but I think the level should be around here,” Skinhøj said.

Madsen at Nykredit said the spread is still more or less what was expected and is in line with the secondary market.

“They are distributing their bonds at the same level we are tapping,” he said.

Sorensen at Danske added that the upcoming ECB meeting on 8 December was possibly accountable for the 3bp-4bp extra yield on the bonds.

“Maybe it’s because people expect the ECB to cut rates and we haven’t accounted for this in our bonds,” he said.

He added the auctions were off to a good beginning, with “ample demand from the start”. The bid-to-cover varied from 2.33 to 3.50, with the euro sales at the upper end of that range.