A record volume of five year adjustable rate mortgage (ARM) bond supply was well absorbed in the latest Danish refinancing auctions last week, with spreads widening only marginally on the back of “strong and stable” demand.

In the auctions, held from Monday to Friday of last week, Danish mortgage credit institutions sold a record high volume of five year ARMs of around Dkr34bn (Eu4.57bn) in Danish kroner and the share of one year issuance, typically the most heavily supplied segment, fell.

“This auction was a bit different from the ones we have done in previous years, because the issuance of longer dated covered bonds was much bigger than what we have done in the past,” said Lars Mossing Madsen, chief dealer at Nykredit. “For the first time, our five year auctions were only a little bit less than our one year auctions.

“We were interested to see whether the market could absorb such a large amount of five year paper coming from all of the mortgage institutions, but there was pretty strong and stable interest. In the future we are going to issue much more of the five years, so it is a positive sign that there was strong demand for these bonds.”

The share of longer dated issuance in future auctions is expected to grow further, as issuers incentivise mortgage borrowers to switch into longer dated loans in response to regulatory and rating agency pressures.

For the issuers to have announced their results when The CBR went to press, demand for five year paper was roughly in line with that for one year paper, with bid-to-covers mostly averaging around 3:1.

Some analysts had suggested before the auctions began that spreads in the five year segment could widen through the week upon the unprecedented weight of supply. Ultimately, spreads of all maturities widened around 2bp between Monday and Wednesday, before tightening back in towards the end of the week – the three years in particular.

“If you look at the levels before the auctions spreads are around 1bp wider now, but given the volumes that have been issued that is nothing,” said Madsen. “Also, today it seems like the bonds are more or less trading at the same level for each of the different institutions.

“The spread that we used to see between different issuers has more or less disappeared.”

The sales also achieved record low yields, with Nykredit pricing one year ARMs at rates of minus 0.08%.