The latest Danish adjustable rate mortgage (ARM) bond refinancing auctions will be held next week, with some Dkr121bn (Eu16.3bn) of covered bond sales expected, including an anticipated record amount of five year supply, which may exert widening pressure on spreads.

Nykredit and Realkredit Danmark will kick off the latest auction season on Monday and will be the most active of the Danish issuers.

Realkredit Danmark will between Monday and Friday offer Dkr58.345bn, including Eu145m in euro-denominated bonds. Nykredit expects to sell some Dkr33.7bn of covered bonds, comprising Dkr33.3bn in kroner and around Eu53.8m in euros, with its sales also concluding on Friday.

DLR Kredit will join the auctions on Tuesday and conclude its sales on Thursday, offering Dkr6.57bn in kroner and Eu120m in euros. Also between Tuesday and Thursday, BRFkredit will offer Dkr12.875bn of its RTL F bonds and traditional non-callable bullet bonds.

Nordea Kredit will be the last issuer to come to market, holding auctions on Wednesday and Thursday and targeting Dkr8.85bn of krone sales and one Eu50m bullet.

Analysts noted that the volume of five year ARMs supply is set to be a record high, with around Dkr30bn expected. The current record is the Dkr15bn sold in the final auctions of 2012, according to analysts at Danske.

“Not least, RD and Nykredit are selling many five year non-callables, but BRF will be issuing around an extra Dkr1bn in five year non-callables for the joint funding of Jyske Bank housing loans,” said the Danske analysts. “RD borrowers seem to have decided to move towards F5 ARMs – refinancing every five years – and we also expect Nykredit borrowers to increasingly prefer F5 ARMs to shorter-term loans – encouraged by the structure of administration fees.”

The prominence of three to five year issuance in the quarterly auctions has increased over recent years as increasing numbers of Danish borrowers have switched to longer dated loans, with lenders incentivising the shift, in response to regulatory and rating agency pressures.

The Danske analysts said the five year non-callables look the best value for investors at current levels.

“The big question is whether the market can sustain the issuance of around Dkr34bn in five year non-callable bullets at low spread levels,” they added. “Spreads could probably widen around 3bp-5bp during the auctions.

“We therefore recommend making cautious bids for five year – and three year – non-callable bullets at the start of the auctions.”

Frederick Nordsborg, head of fixed income research at Nordea Markets, said the trend towards higher five year supply will continue in the coming years, and said the spread impact of this could become more pronounced over the longer term.

“Given underlying market rates and relative value we do not see significant spread curve steepening at the auction,” he said, “but in a longer term perspective the spread structure could steepen in order to reflect the structural supply trends.”

Since the last auction season in November, spreads across all maturities have tightened by around 5bp versus swaps.

“Spreads are tighter than previously and the spread structure has flattened, which in principle suggests not going too far out on the curve, since hedged mandates see reduced value at current pricing,” said Nordsborg. “On the other hand the absolute yield level is higher and the potential roll down has improved significantly.

“This should drive enough demand to keep pricing at close to current levels, also given the relative pricing versus alternatives.”