Nykredit and Realkredit Danmark kicked off the latest Danish refinancing season yesterday (Monday) and market participants said the demand and levels achieved in the first of over Dkr168bn (Eu22.5bn) of sales were surprisingly strong, with a drop in supply of ARMs cited as the likely cause.

According to analysts at Danske, Denmark’s mortgage credit institutions are selling Dkr145.3bn and Eu3bn of bullet covered bonds to refinance adjustable rate mortgages (ARMs) from yesterday to Thursday of next week (26 November) plus a DLR Kredit sale on 2 December, with KommuneKredit, which has not given full details yet, expected to sell Dkr5bn and Eu700m as well. Nykredit Realkredit is also on Friday selling Dkr10.9bn of “RenteMax” FRNs.

Danske’s analysts said that the ARMs bonds performed some 5bp in the run-up to the auctions, with expectations of generally lower than expected supply a factor, highlighting significant remortgaging out of three, five and even longer ARM loans. Nykredit meanwhile noted that its Dkr21bn equivalent supply of one year ARMs is down almost Dkr90bn from the peak for the instrument in the corresponding 2009 auctions.

“The mortgage credit institutions have managed to move a lot of borrowers out of the one year to longer ARMs and other issues,” said Lars Mossing Madsen, chief dealer at Nykredit, “meaning the amounts of one year ARMs on these auctions are much, much smaller than we have seen in the past.”

Analysts had nevertheless noted that significant amounts of bonds will be sold by year-end after the auction season and that other potentially negative factors have been at play.

“We know that the lines the banks are giving to various accounts has been reduced over the years,” said Anders Aalund, chief analyst at Nordea Markets, for example. “Overall it was very difficult to predict the outcome.”

However, the first sales, yesterday, ultimately represented a positive outcome, according to Aalund and other market participants.

“Overall it’s going well,” said Nykredit’s Madsen. “Interest has been mainly much higher and the level is basically 2bp-4bp tighter than we were expecting before the auctions.

“Some of the auctions have been showing larger interest than on average in the past, with the three years especially well bid.”

At a Dkr1.2bn auction of three year ARMs yesterday Nykredit achieved a bid-to-cover ratio of 5.08, while its Dkr3.2bn of one years achieved 3.78. The one year paper was sold at a level of 22.2bp versus Cita yesterday and 24.5bp today (Tuesday), according to Madsen, and the three years minus 3bp and minus 4.5bp, respectively.

The levels and bid-to-covers achieved by Nykredit yesterday beat those of Realkredit Dannmark (RD), which sold Dkr6.5bn of one years with a bid-to-cover of 1.85, Dkr2.72bn of three years with 2.54, and Dkr1.41bn with 2.84, and a market participant said that the levels were a couple of basis points wider than Nykredit’s. He suggested that the relative levels of demand were due to LCR factors, with Danish banks not able to hold their own bonds for LCR purposes and RD parent Danske’s larger size versus Nykredit playing in the latter’s favour, although another market participant noted that RD was simply selling larger amounts than Nykredit on this occasion.

BRFkredit held its first sale this morning and market participants noted that its one years had come roughly flat to Nykredit and inside RD paper, in contrast to its typical levels.

“That was surprising because they are normally 3bp-5bp cheaper than Nykredit and RD,” said one “Today they were at the same level and that hadn’t been seen in secondary before.

“It is difficult to draw any conclusions from just one auction,” he added, “so it is not clear if it is a trend.”

However, another market participant said that the new pricing level was not unexpected following the merger of BRFkredit with Jyske Bank to make it “a fairly strong player”.

DLR Kredit begins its auctions on Thursday and Nordea Kredit on Monday.