Spreads on Danish krone denominated covered bonds being sold in the Danish covered bond auction season have tightened 4bp-5bp, with Denmark’s status a safe haven being cited as a reason for this.

Realkredit Danmark kicked off the auction trading at 53bp-54bp over swaps but is now averaging 52bp, and yesterday (Thursday) sold bonds at as low as 49bp over.

Nykredit group, comprising Nykredit Realkredit and Totalkredit, sold bonds at 51bp over swaps yesterday, while Nordea Kredit has been selling its bonds at 39bp but yesterday was at around 37bp.

Market participants said the covered bonds have been continuously narrowing since the launch of the auctions.

“The spread has been narrowing all through the auction,” Anders Aalund, chief analyst at Nordea Markets, told The Covered Bond Report. “It’s normal for the beginning of the auction to start off wider, so the auctions are actually progressing as expected.

“There has been a lot of rating distress after Realkredit Danmark and BRFkredit got rid of Moody’s and the effect of this created some uncertainty, but these auctions would seem to disprove that it was a problem,” he added.

Realkredit Danmark and BRFkredit dropped Moody’s after the rating agency increased refinancing margins and downgraded Danish covered bond programmes after re-evaluating refinancing risk related to adjustable rate mortgages (ARMs) in June and downgraded some Danish issuers.

Nykredit first vice president Lars Mossing Madsen said there had been good demand for Danish krone bonds recently.

“I think there is a lot of talk about northern Europe being a safe haven, and it seems like this is a positive spill-over from that discussion,” he said. “We’re getting new low levels at our auctions, with an extremely low yield of 1.12% and a high bid to cover of 3.7.”

Realkredit Danmark has averaged a bid to cover on one year ARMs of 2.5 to 2.75, and Nykredit has averaged above 3 on its one year bonds.

“It’s going really smoothly,” said Jens Peter Sorensen, chief analyst at Danske Bank (Realkredit Danmark’s parent). “Danish investors are buying whatever they can given the risk in euro land.

“Lots of money needs to be re-invested, an expectation of an interest rate cut, and euro-land problems have led to tighter spreads and higher bid to cover.”

But Madsen cautioned that the auctions still had a long way to go.

“It seems like it will continue this way over the next couple of days,” he said, “but we still have nearly two weeks of auctions.”

Head of management secretariat at DLR Kredit Lars Blume-Jensen said he has been somewhat surprised that the rate has been going down steadily since the beginning of the auctions.

DLR Kredit started selling Dkr11.5bn (Eu1.5bn) of its total Dkr34bn at 61bp over swaps in Danish krone denominated bonds yesterday (Thursday) and will sell Eu1bn of its total Eu3.03bn (Dkr25bn) today (Friday).

Dkr30bn of it its Danish krone denominated bonds and Eu3bn of its euro bonds are one year fixed bullet bonds.

Blume-Jensen said DLR Kredit bonds trade a little wider than the other issuers because of the covered bond rating being Aa1 – most Danish covered bonds are Aaa – and its loans are commercial.

He added that the level was in line with the spread from the previous year.

“Before 2008, it was tighter,” he said, “but in the last few years it has been about the same level.”

Aalund at Nordea Markets said that since DLR Kredit is concentrated in agriculture and this sector is going through a troubled period investors demand a higher pick-up when buying these bonds, which is why it is trading cheaper than the other issuers.