Nordea Kredit wrapped up its latest ARM bond refinancings yesterday (Thursday), selling Dkr16.1bn (Eu2.2bn) of bonds and, according to a Nordea analyst, achieving slightly tighter levels than expected. Nykredit, meanwhile, has been selling ROs as part of its two-tier LTV model.

Nordea, Copenhagen

In Danish kroner, Nordea auctioned Dkr12.9bn (Eu1.73bn) of one year ARM bonds, Dkr210m of two years, Dkr2.33bn of threes, Dkr40m of fours, and Dkr620m of five year bonds. It also sold Eu170m of one year ARM bonds in euros across two days.

The bid-to-cover on Nordea’s one year ARM bonds declined from 4.02 on Tuesday, the first day of its auctions, to 3.62 yesterday, while the bid-to-cover on its three year offering rose from 2.55 on Tuesday to 3.48.

Jacob Skinhøj, head of covered bond research Nordea Markets, said that Nordea’s auctions achieved tighter than expected spreads and that the small size of Nordea’s auctions explained this. The issuer’s three year and five year Danish krone bonds came at 4.4bp and 24bp over three month swaps on Thursday, he said.

Nordea’s sales came in the middle of Dkr109bn of Danish krone ARM auctions by Nykredit Realkredit (which is also selling Eu2bn of euro denominated interest reset bonds) and Skinhøj said that the spread between Nordea and Nykredit one year ARM bonds was relatively stable over the period in which the issuers’ auctions overlapped, at 3bp-4bp.

Anders Aalund, chief analyst at Nordea Markets, said that interest rates fell during the course of the auctions this week as a result of volatility and concerns triggered by the Italian elections. However, spreads on the one year Danish krone ARM bonds remained constant over the auctions, he said, with Nordea’s trading at 17.8bp over Cita to begin with and then ending up at 17.5bp over yesterday.

“The levels are expensive, but justified by the high quality of the bonds and the strong demand,” he said.

Investor appetite for one year ARM bonds has been boosted by a recently announced plan by the Danish central bank to reduce its T-bill issuance programme, added Aalund, with bank treasuries having a preference for short dated bonds that are in short supply.

The share of one year interest reset bonds in Danish mortgage banks’ auctions has been decreasing over past few years as borrowers move out the curve to take out mortgages with longer interest reset periods, and Aalund said that there is no reason why spreads on one year ARM bonds should widen.

The spreads on Nordea’s three year ARM bonds narrowed somewhat over the course of the auctions, according to Aalund, with five year ARM bond spreads widening.

“The asset swap spread curve steepened in Danish krone ARMs,” he said, “with five years having gone up a lot because borrowers are refinancing in that maturity so a lot of five year bonds are coming to market because of the balance principle.

“Overall we believe that the curve will steepen in the medium to long term.”

Nykredit on Wednesday auctioned its first Capital Centre G bonds as part of its latest refinancings. It uses this capital centre to fund, via traditional Danish mortgage bonds (realkreditobligationer, or ROs), top tier loans with LTVs from 60%-80% originated under the bank’s two-tier model. In contrast to covered bonds (særligt dækkede obligationer (SDOs)), ROs do not have to comply with continuous LTV limits so that overcollateralisation does not have to be increased if the market value of the collateral declines. It uses SDOs to fund mortgage loans with LTVs up to 60%.

Björn Sebastian Olesen, analyst at Nykredit Markets, said that the expectation had been for a spread differential of around 11bp between Capital Centre G ROs and Capital Centre H SDOs, in line with market levels before the auctions, but that this tightened to 9bp.

On Wednesday one year euro Capital Centre G ROs traded at 36.3bp over Eonia, according to Olesen, while one year Capital Centre H SDOs traded at 26.9bp to provide for a 9bp spread. Yesterday Nykredit auctioned one year Capital Centre G ROs in Danish kroner, which came at 30.8bp over Cita versus 22bp over for one year Capital Centre H SDOs in Danish kroner.

Nykredit’s auctions run until next Friday (8 March).