Realkredit Danmark auctioned Dkr33.24bn of floating rate mortgage covered bonds in Danish krone and euros yesterday (Tuesday), and after the sale of Danish krone FRNs fell short of expectations market participants were closely monitoring a Nordea Kredit auction today.

Realkredit Danmark auctioned Dkr29.3bn (Eu3.94bn) of three year mortgage covered bonds (SDROs) and Eu530m of one year SDROs, issued out of capital centre T, to refinance FRNs maturing on 1 July. The one year euro bonds came at 18bp over three month Euribor, and the three year Danish krone FRNs flat to six month Cibor.

Realkredit Danmark, Aarhus

These compare with Danske Bank analyst expectations of a spread of around minus 10bp for the three year Danish krone Cibor FRNs and 25bp over Euribor for the one year euro SDROs, while Jacob Skinhøj, chief analyst at Nordea Markets, had expected the three year Danish krone bonds to come some 5bp tighter.

Jens Kristian Kimper, head of product innovation at Realkredit Danmark, said that the pricing was disappointing. The pricing of the Euribor bonds was slightly better than expected, he said, but the three year bonds ended up trading between 8bp-10bp cheaper than anticipated.

“The bid-to-cover ratios were in line with expectations; it’s the low pricing that is being debated,” he said. “We are monitoring the Nordea auctions closely, because the pricing should be in line with that for our bonds.

“We haven’t come up with any reasonable explanation for the low pricing of our three year bonds.”

The bid-to-cover on the Danish krone FRNs was 1.38, and 3.34 on the euro FRNs.

Nordea Kredit this (Wednesday) morning auctioned Dkr18.8bn of three year Danish krone FRNs out of capital centre 2 to fund the refinancing of FRNS maturing in July.

Jens Kristian Kimper

Danske Bank analysts had expected the bonds to trade at the same level as Realkredit Danmark’s Danish krone FRNs but had said they could end up trading 1bp-2bp tighter because the auction is after Realkredit Danmark’s.

The difference in pricing ended up larger, however, with Nordea’s FRNs coming at 7bp through Cibor, with a bid-to-cover of 3.16.

Christina Falch, senior analyst at Danske Bank, suggested several possible reasons for this.

“Nordea’s auction was last, and the refinancing auctions in December show that spreads tend to narrow as participation increases throughout the course of the auction,” she said. “Also, Nordea’s mortgage covered bonds are still rated Aaa by Moody’s and although that’s probably not that big a factor there seems to be a preference for Nordea bonds at FRN refinancing auctions.”

She said that the auction of Realkredit Danmark’s three year FRNs was weak compared with expectations, and that a bid-to-cover of 1.38 was low for a refinancing auction, with last year’s summer FRN bid-to-cover ratios at 2 to 4.

“It was a bit of a surprise, although the euro auction was very good, with spreads tighter than we expected,” said Falch.

Skinhøj at Nordea Markets said that at some Dkr50bn the volume of bonds auctioned over the two days is quite large and that the term-to-maturity of the bonds is longer than usual and, taking into account upcoming Basel III regulations, that could have an impact on demand.

“FRNs are usually very popular with bank treasuries,” he said, “but our impression is that they would prefer one to two year FRNs because that way they will have matured before the liquidity coverage ratio (LCR) requirements come into effect under Basel III.”

Own-issued bonds are not eligible for the LCR and bank treasuries holding them would therefore want to sell or switch out of them in anticipation of the liquidity rules being implemented at the beginning of 2015, according to Skinhøj.

He suggested that Realkredit Danmark’s three year FRNs traded slightly less expensive than expected because of the volume of the auction and the bonds’ maturity, and that the level looked too cheap compared with today’s 7bp through Cibor in Nordea’s auction.