Danish covered bonds have begun to retrace recent gains after the country’s banks took just Dkr18.9bn (Eu2.6bn) at a Danmarks Nationalbank three year loan facility on Friday, well below estimates that had ranged from Dkr75bn-Dkr150bn.

During Denmark’s March covered bond auction season, market participants had said that lower spreads on covered bond sales were driven by anticipation of the Danish LTRO on 30 March, because investors would take funds from the LTRO and put them into covered bonds.

“We had seen some spread performance in shorter dated ARMs (adjustable rate mortgages) before the LTRO,” said a covered bond analyst in Copenhagen. “We believe this was due to an expected need to place cash after the auction and that three to five year ARMs might lose some ground now.”

However, this expectation proved wide of the mark and he said that three and five year ARMs have since the LTRO lost 2bp-3bp. He said that the extent of the loss was due to many Danes being off for seasonal holidays.

“There hasn’t been much trading yet, so I expect they will lose more next week – maybe a total of 5bp-6bp when the investors return,” he added.

He said that the drop simply corrected the spread tightening from before the LTRO when expectations were for a larger take-up.

The analyst added that one to two year ARMs were likely to remain at the same level because bank treasuries mainly bought the bonds and would hold onto them.

Jan King, senior covered bond analyst at RBS, said he was a bit surprised at the volume of the LTRO versus the overall volume of the Danish banking system.

“Compared to Fitch data on total assets of the Danish banking sector, the LTRO came out at 0.4%,” said King. “For the euro-area, our estimate is around 3%.

“However, we must not forget that the euro-area figure includes both LTRO operations and the second LTRO in Denmark in September is yet to come.”

He said that the small LTRO shows that domestic access to funding in Denmark is quite good.

“Maybe the banks in Denmark do not need the money,” he said.

Analysts at Danske Bank wrote that one reason for the low amount could be that there is a second LTRO auction coming up, and that most of the government guaranteed bonds mature in 2013.

King at RBS noted that Denmark’s largest lender, Danske Bank, had taken the largest share of the LTRO in relation to the other banks, with Dkr15bn of the total.

“If you compare the overall size of Danske Bank with the share in the LTRO, it is relatively high,” said King. “Danske’s take-up was more in line with its European peers.”