Nykredit achieved healthy bid-to-cover ratios on the first day of auctions of bonds to refinance adjustable rate mortgages (ARMs) today (Monday), but market participants expect smaller Danish sales to require increasing premiums to compensate for their lack of LCR eligibility and liquidity.

Nykredit Realkredit sold Dkr4.1bn (Eu549m) of one year bonds and Dkr3bn of three years this morning, achieving bid-to-covers of 3.66 and 3.26, respectively. The one year bonds were sold at a yield of 0.08% and a spread to Cita of 22.8bp, according to Lars Mossing Madsen, chief dealer at Nykredit.

“It went in line with expectations,” he said, “and the bid-to-covers were definitely better than expected, showing strong interest in the bonds.”

The sales kick off some Dkr100bn of auctions over the coming weeks. BRFkredit announced last Thursday that it will be holding sales this Wednesday and Thursday and on Tuesday to Thursday of next week, raising some Dkr8.3bn.

Nordea Kredit will be selling some Dkr18.5bn equivalent of paper on Tuesday to Thursday of next week, Dkr16.93bn in kroner and Eu210m in euros, of which Dkr10.5bn and Eu170m will be one years.

Its volume of one year Danish krone ARMs is down almost half from the Dkr20.58bn it refinanced a year ago, while Nykredit’s one year supply is down from some Dkr66bn to Dkr40.7bn, with the institutions having for mainly regulatory and rating reasons encouraged borrowers to take out alternative mortgages to the ARMs.

While this has brought hoped-for benefits to issuers, the trend is having an increasing impact on the market pricing and liquidity of smaller issues that are being sold, according to market participants, particularly with LCR implementation progressing.

According to Anders Aalund, chief analyst at Nordea Markets, 34% of the bonds in Nordea Kredit’s forthcoming sales on a volume-weighted basis do not meet Level 1B eligibility, although the figure is only 4% for Nykredit. The issue is also expected to affect the smaller BRFkredit – as only one of its issues (its one year ARM) will be Level 1B-eligible, according to Aalund – and DLR Kredit – the latter has not announced details of the sales it will be holding in early September.

“However, the LCR requirement is by no means the only requirement determining success or failure,” said Aalund. “Several other factors make the sale of so many separate security IDs problematic.”

According to Jan Weber Østergaard, senior analyst at Danske Bank, these include the generally lower liquidity of smaller issues, with lower turnover, less price transparency, and higher costs for market-makers.

He said that these factors could lead to a premium of 10bp-15bp being required for smaller issues, although he added that this could take some time to materialise, while Aalund put the ultimate premium that may be required of small issues as high as 20bp-25bp at the next set of auctions in three months’ time.

“It is getting more and more important,” said Aalund.