Relatively low supply and anticipated strong demand in upcoming Danish adjustable rate mortgage (ARM) bond refinancings beginning on Monday are expected to support smooth sales and further underpin spreads already at historic lows, especially in three and five year non-callables.

Danish mortgage credit institutions have announced planned sales of Dkr70.4bn (Eu947m) equivalent, comprising Dkr63bn of non-callable bonds and at least Dkr7.5bn of floaters.

BRFkredit will commence the sales on Monday, and plans to issue Dkr11.295bn of its RTL F bonds and traditional non-callable bonds, with maturities of three to five years, in sales running until next Friday.

On Tuesday, Nykredit will begin its auctions, which will run until Monday, 28 August. It will be the most active issuer, offering Dkr37.5bn equivalent – comprising Dkr28.9bn of new lines (Dkr20.3bn of one years, Dkr4.6bn of three years, and Dkr4bn of five years), Dkr1.107bn in taps of existing 2018-2021 ARMs, and Dkr5bn and Eu300m (Dkr2.45bn) of floating rate notes.

Nordea Kredit will offer Dkr14.565bn of one to five year ARMs and Eu100m of one year ARMs between Tuesday and Thursday, while DLR Kredit will offer Dkr6.265bn of one to three year ARMs on Wednesday and Thursday.

Realkredit Danmark will issue Swedish krona and Norwegian krone bonds, via syndicated sales of only “minor” amounts, according to a spokesperson.

The scheduled volumes will result in negative net supply of ARMs of some Dkr26.5bn, and market participants expect to see a repeat of the strong investor demand in recent previous auctions.

“The auction supply is declining while the interest is still pretty high, so I can’t foresee any problems,” said Lars Mossing Madsen, chief dealer at Nykredit. “I am definitely not nervous for these auctions.”

Analysts at Danske noted that supply of three and five year bonds in particular will be below expectations, suggesting that higher volumes of such bonds will be offered in forthcoming sales, in late September. They said there has been in particular considerable refinancing out of three year ARM loans, especially at DLR Kredit.

“DLR Kredit appears to be the only institution with a significant shift of borrowers into five year ARM loans – which was also DLR’s particular mission after having first shifted borrowers from one year to three year ARM loans,” they added.

Danske’s analysts expect the limited supply and anticipated strong demand, including from foreign investors, to support spreads that are already at or close to record lows. They noted that spreads are around 4bp-7bp tighter than at the last refinancing auctions, in May, and that the average spread of Nykredit’s one year bonds in the last auction was the tightest since December 2006 auctions, at Cita minus 2.4bp The current spread for five year bonds is also at its lowest since the start of the November 2014 refinancing auction period.

They added that there is limited potential for further spread performance, suggesting that if spreads contract by another 10bp, banks and to some extent pension funds may for regulatory reasons buy Danish government bonds in the place of non-callables.

Madsen said it is hard to say whether spreads will tighten further.

“What we can say right now is that in recent auctions we have seen that supply has driven a tightening process,” he said. “Why not this time?”

He also noted that the spread differential between the non-callables and floaters has also tightened substantially over the course of 2017.

“We have seen in recent years that due to various reasons there has been a spread in the relative pricing between fixed and floaters, with floaters being cheaper,” he said. “But this year, that spread has been tightening and tightening, and is now the tightest we have seen in many years.”

According to Danske’s analysts, the premium offered by floaters relative to bullets is between 0bp-5bp, down from 2bp-6bp in the last auctions and 8bp-11bp in 2016’s auctions.