Denmark’s latest covered bond auction season is in its third day today (Wednesday), with market participants highlighting as surprising Nordea and Nykredit one year ARM bonds coming at similar levels yesterday, thereby upsetting a traditional pricing relationship.

Nykredit group began its auctions on Monday, while Nordea started yesterday, with DLR Kredit and Realkredit Danmark holding auctions in March.

Jens Peter Sorensen, chief analyst at Danske Bank, said that the auctions have been going well, roughly in line with results in the past two years, with the only surprise that Nordea Realkredit’s bonds were coming at around the same level as Nykredit’s.

“I was expecting Nordea’s bonds to be a bit more expensive,” he said. “Apart from that, it’s business as usual.”

Jacob Skinhøj, chief analyst at Nordea Markets, had a similar reaction, noting with surprise that Nordea and Nykredit yesterday auctioned bonds at the same spread, of 37bp over CITA (Copenhagen Interest T/N Average).

“Either Nykredit is trading very expensively or Nordea Kredit is trading very cheaply,” he said. “If this quite surprising identical pricing of one year ARMs continues during the auction, I expect it to be due to two factors: Danish banks becoming Basel III compliant (not being able to include own covered bonds in their capital requirements) and new Danish regulation, implying a risk weighting of 0% not only for own SDO covered bonds but all SDO covered bonds under the regulation for large exposure.”

However, Skinhøj said that he does not expect pricing on Nordea and Nykredit one year ARM bonds to continue to be identical. He said that he expects the average spread in the auctions to stay around the high 30s, mainly because of three year liquidity being made available to banks by the Danish central bank in a longer term repo operation on 30 March.

“The knowledge that the banking system will be more liquid is making spreads tighten even more,” said Skinhøj.

Lars Mossing Madsen, chief dealer, first vice president, Nykredit, said that its three and five year dated bonds were today auctioned at tighter levels than yesterday, and also came tighter than where the issuer tapped these last week in separate sales. The three year bonds were auctioned at 4.6bp through mid-swaps and the five year at 17.5bp over mid-swaps today, he said.

“We would expect the pricing on our one year ARM bonds today to be more or less in line with yesterday’s levels,” he added.

He also noted that Nordea’s one year ARM bonds had come at the same level as Nykredit’s on what was the first day of Nordea’s auctions yesterday, and said that Nordea’s bonds have traded tighter than Nykredit’s in the past couple of auctions.

“That’s the most interesting, although it’s difficult to say what it is due to,” he said.

He suggested that because Nykredit is auctioning a greater volume of bonds – Dkr72bn versus Nordea’s Dkr10bn – the appeal of greater liquidity could be helping to drive demand for its covered bonds.

Bid to cover ratios in Nykredit’s auctions have ranged from 1.44 to 5.08, according to results available mid-morning today. The lowest bid to cover ratios were for realkredit obligationer (ROs) issued out of capital centre G, which are rated Aa3 by Moody’s and feature a 2013 maturity.

Nordea’s Skinhøj said that this is due to there being a very limited amount of investors that can buy these particular bonds on account of their lower rating, and noted that they trade roughly 40bp wide of the SDOs launched out of capital centre H.

Nykredit’s Mossing Madsen said that the smaller size of the auction in these bonds and their lower rating could be keeping demand at bay.

“But when volumes are not that big bid to covers can change quite a bit,” he added.

In a preview of expectations for this season’s auction round, market participants had previously discussed the implications of Moody’s reviews for downgrade covered bond programmes of Danske Bank, DLR Kredit, Nykredit’s Realkredit and Totalkredit, with issuer ratings also caught up in a far-reaching series of bank rating actions two weeks ago. (See article here)

Danske’s Sorensen said that based on the pricing of Nykredit’s ROs he does not expect Moody’s reviews for downgrade to hit DLR Kredit’s auctions too hard.

“We will see how much the price difference will be,” he said, “but given that Nykredit has issued at quite low spreads, with only a modest premium of around 10bp-15bp, this should bode quite well for DLR Kredit.”