Spreads in the latest Danish ARM bond refinancings last week widened to their highest levels in at least a year, as rising yields and wider volatility took a toll, although demand remained “reasonable” as issuers sold some DKK121bn (EUR16.2bn) of non-callables.

The sales of adjustable rate mortgage (ARM) bonds began on Monday of last week and ended last Friday, with Danish mortgage credit institutions having sold some DKK121bn-equivalent of bonds, of which DKK119.275bn were Danish krone-denominated non-callable bullets. Over half, some DKK65bn, were one year bullets.

Most auctions in recent years have seen an imbalance between demand and supply, often underpinned by strong foreign interest, resulting in tightening or at least stable spreads and consistently high bid-to-cover ratios.

However, on the first day of last week’s auctions, spreads widened across all maturities by 4bp-6bp. The most significant widening was seen in one year bullets, while all issuers’ bonds were affected.

“Sentiment remained negative on subsequent auction days, with spread widening hitting longer non-callable bullets in particular,” said Christina Falch, senior analyst at Danske Bank. “Callable mortgage bonds in general were under a particularly dark cloud driven by rising yields and volatility and by OAS spread widening.

“For the one year segment we would have to go back to the November 2016 refinancing auctions to find higher spread levels,” said Falch, “while for the three year and five year bonds we would have to go back to February 2017 to find higher levels.”

Realkredit Danmark was the most active of the issuers, selling around DKK55.6bn equivalent. Nykredit sold DKK34.945bn equivalent, BRFkredit DKK15.4bn, Nordea Kredit DKK9.25bn and DLR Kredit DKK5.62bn. Between them, Realkredit Danmark and Nykredit sold EUR250m of euro denominated bullets.

“How the auctions went depends on how you look at it,” said Lars Mossing Madsen, chief dealer at Nykredit. “There were reasonably good bid-to-covers throughout the auctions, but all the mortgage institutions faced this spread widening from the levels we saw on the secondary market before the auctions.”

Some spreads tightened over the course of the week, while remaining above pre-auction levels.

“I think the first move out was maybe too far, so spreads then moved back in gradually by up to 3bp-4bp in some cases,” added Madsen.

He suggested that the main reason for the widening was the turbulence in the broader market environment. As uncertainty rocked equity markets last week, volatility in yields increased.

“The general interest rate environment was higher rates in the week of the auctions, and that was reflected in the pricing of the Danish mortgage bonds,” said Madsen. “I don’t really see any special domestic reasons specific to the Danish mortgage bond market for this spread widening, and we saw credit widening last week that affected other Scandinavian mortgage markets.”

Analysts said that investor interest was also limited by changes in relative value ahead of the auctions that made non-callable bullets appear relatively expensive versus other asset classes, with demand for shorter-dated bonds particularly affected.

“Our view is that the correction, apart from the global financial market turmoil, is due to secondary internal mortgage bond factors,” said Jan Weber Østergaard, chief analyst at Danske, “firstly the sharp rise in duration – though not as in 2015, secondly very limited foreign buyer interest and thirdly Danish investors who demonstrated limited buying interest in 2017 due to the, historically speaking, expensive relative pricing of callables.

“In addition, the mortgage banks have been holding their refinancing auctions at the same time.”