Realkredit Danmark is today (Friday) concluding sales of Dkr45bn and Eu500m to bring the Danish covered bond auction season to an end, with market participants noting a compression in spread differentiation between the major issuers.

The Danske Bank subsidiary paid an average spread of about 40bp over swaps, close to Nykredit’s level of 38.7bp over.

“The difference is very small this auction season between all issuers, but mainly between Nordea, Realkredit Danmark and Nykredit,” said a syndicate official at Realkredit Danmark.

“Over the last few days we have been wondering a lot about why there is such a small difference between issuers,” he added. “We had expected a difference of around 10% in favour of Nordea versus Nykredit, but there ended up only being a 3bp difference between the two.”

He noted that Monday was the only day when Nykredit and Realkredit Danmark both sold bonds – Nykredit ended its auctions on Monday – and at that time there was only about a half basis point difference.

“I don’t know if this is the new picture, and we won’t know until the next auctions in September,” he said.

The syndicate official added that this was the first time Realkredit Danmark had participated in the April auctions.

Lars Mossing Madsen, chief dealer, first vice president, Nykredit, also said it seemed there was almost no difference between institutions.

Nykredit achieved a record low yield according to Madsen, and a bid to cover that ranged from 1.30 to 5.08.

Madsen attributed the low spread to liquidity, regulatory changes prompting investors to increase purcahses of Nykredit paper, and spreads across markets having tightened.

“The spreads in the euro market have dropped even more,” he noted.

Jacob Skinhøj, chief analyst at Nordea Markets, said the main reason for the tightening of the spread differential between the issuers is that Nordic banks are preparing for Basel III.

“I think going forward the spread differential will be tighter than what we have been used to,” he said. “We expect about five basis points difference between Nordea and Nykredit from next year’s auction and going forward.”

Auction results – spreads to Cita

Source: Nordea Markets