One year adjustable rate mortgage (ARM) bonds were sold at negative yields in a Danish auction season for the first time this (Monday) morning as Nykredit and Realkredit Danmark began sales, although levels had backed up sharply from last week on the back of a krone reversal.

The Danish central bank, Danmarks Nationalbank, has cut its key interest rate to a record low of minus 0.75% to counter upward pressure on the Danish currency and yields on ARMs bonds have entered minus territory. This led Nordea Kredit and Nykredit to stop offering one to three year adjustable rate mortgages at the beginning of the month and prompted the establishment of a government working group to recommend how to handle issues arising from negative interest rates on mortgages.

The latest auctions season began today, with Nykredit Realkredit and Realkredit Danmark (RD) active, and Nordea Kredit due to start auctions tomorrow (Tuesday).

Market participants said that this morning’s sales (more are taking place this afternoon) were marked by a sharp widening versus levels quoted last week. Nykredit Realkredit’s one year ARMs, for example, were sold at a yield of minus 0.11% and an analyst said that this represented an underperformance of 30bp-40bp versus the second half of last week. He said that last week’s levels were based on thin trading, but there had also been a turnaround in the foreign exchange market, with the krone falling towards a level of Dkr7.46/Eu – its cheapest level this year.

“On Friday there were strange things going on,” he said. “Things totally turned upside-down. There was this guy talking about capital controls for Denmark and the whole situation was quite absurd. But it just underlines that the markets were very thin.”

He said that the back-up in levels to those on today’s auctions reflected two factors.

“There are a limited amount of foreigners, because otherwise they would have bought, looking at the yields combined with the FX forwards,” he said, “and Danish investors do not believe that this is a long-lasting crisis, so they did not want to buy at the very low levels, because if this blows over and the Danish central bank starts to hike again this will be a poor investment.”

Nykredit achieved a bid-to-cover of 2.86 on Dkr8bn (Eu1.07bn) of one year ARMs this morning and RD 1.53 on Dkr5.9bn. Bid-to-covers on three year sales were 1.28 for Nykredit and 2.27 for RD, with their five year sales achieving 1.5 and 2.27, respectively. A Eu200m one year sale by Nykredit achieved 3.6 at a positive yield of 0.064%.

“All in all it has been a complicated day to have the auctions, to be honest,” said a funding official involved in today’s sales. “You have all this uncertainty with the krone. I would say that interest on the first day has been limited.”

The last auction season, in November, opened with a sharp widening of spreads and low bid-to-cover ratios, and the funding official said that today had proven similarly challenging.

Nordea and Nykredit are meanwhile offering three year adjustable rate mortgages again, with the yield having risen back into positive territory. The government working group is yet to report back with recommendations.