Denmark’s end-of-year auctions of adjustable rate mortgage bonds started yesterday (Monday) with sales for Nordea Kredit and Realkredit Danmark, and analysts said the auctions will include a greater share of three and five year bonds than ever, although this is only partly due to borrowers recently taking out loans with longer fixed interest periods.

Nordea Kredit and Realkredit Danmark kicked off the refinancing auctions yesterday, with BRFkredit joining in tomorrow, albeit via a tap sale rather than auctions, and Nykredit Realkredit starting its auctions on Thursday. DLR Kredit will auction Danish krone adjustable rate mortgage (ARM) bonds on three days, starting 3 December. The auctions will be held over 16 trading days in total, stretching until Monday, 10 December.

Realkredit Danmark has auctioned Dkr16.6bn (Eu2.23bn) of Danish krone-denominated one year ARM bonds, among other bonds, over the past two days, with an average bid-to-cover of 5.655. Nordea Kredit has auctioned Dkr13bn of one year ARMs, with an average bid-to-cover of 4.95. The yield on Nordea’s one year bonds has declined from 0.287% yesterday to 0.26% today (Tuesday), with the bid-to-cover higher today (5.64) than yesterday (4.26).

Bjørn Sebastian Olesen, analyst at Nykredit Markets, said that the share of one year ARM bonds is lower than in previous years, and that the share of three year and five year ARM bonds is higher than ever, with the refinancing rate overall lower than in the past few years.

“The proportion of three year and five year RTLs [Danish fixed rate mortgage bullets funding ARMs] offered has risen to 14% and 8% from around 7% and 5% the past two years,” he said. “A significant reason for this is that the number of loans with three year and five year interest reset periods is higher this year.”

Of Dkr405bn Danish krone-denominated RTLs maturing in January, around Dkr60bn are three year RTLs and Dkr17bn five year, he said, equal to 15% and 4%, respectively.

Danish mortgage banks have been trying to encourage borrowers to take out loans with longer fixed interest periods, in part in response to regulatory concerns about refinancing risk in relation to large volumes of one year ARM bonds.

However, Olesen attributed the large amount of three year bonds being offered at these auctions mainly to there having been a larger than usual issuance of bonds with this interest period three years ago, with these loans now up for refinancing.

“There is a small increase in five year bonds’ share of the expected issuance amount in the forthcoming auctions,” he said, “but it wouldn’t qualify as a change of behaviour, where borrowers in general opt for loans with longer fixed interest periods.

“That is yet to come.”

Jan Weber Østergaard, senior analyst at Danske Bank, said that the overall amount of ARM bonds being auctioned is in line with his expectations, adding that although some borrowers moved out from one year FlexLoans to an ARM with a five year refinancing period there was no big move in this direction.

Jacob Skinhøj, chief analyst at Nordea Markets, said that the overall amount of ARM bonds being auctioned is less than in the past, with the biggest change coming from a reduction in the volumes of one year bonds up for sale.

“Usually around 93% of the total ARM bond auction amount is for one year bonds,” he said, “but this year it’s only around 77%. This shows that quite a few borrowers decided to take out longer dated mortgages, moving out to three year and five year refinancing periods.”

However, the take-up of three and five year ARMs is less than he expected, he added.

Østergaard said that one year ARM bonds are likely to meet with very high demand because volumes are lower than they used to be, with spreads having tightened over the past couple of months.

“Three years should sell well, too,” he said, “although it is a bit more uncertain what the spreads will be on five year bonds because there is a bit more duration, which fewer investors go for.”