Denmark

Denmark’s Nykredit Realkredit will launch a new mortgage funding model this quarter, in an attempt to lower its covered bond issuance costs in an environment of falling house prices.

The European covered bond market is stabilising on Friday, with buyers reported in French and Scandinavian names. But the Spanish market remains shaky, and though selective bids returned the macro sovereign backdrop deteriorated after Thursday's brief impovement.

Danske Bank sold a Skr3bn (€340m) five year deal at 115bp over mid-swaps on Thursday, its first benchmark trade in the currency.

Realkredit Danmark began its March auctions on Monday, offering one year bonds in Danish kroner and euros. The borrower is optimistic after strong auction results from other Danish banks in recent weeks, and reported yields of below 1% from its first day of sales.

The performance of cover pools has deteriorated, Crédit Agricole research has found after examining Moody’s, Standard & Poor’s and Fitch’s data. But this is not because of worsening credit risk but rather because of market risk.

Nykredit will begin the first Danish auction of 2012 later this month, selling an estimated Dkr115bn (€15.4bn) between February 27 and March 12. The traditional one year adjustable rate mortgage bonds will make up the bulk of the auction, though with the low yield environment borrowers have moved along the curve.

For the first time in Denmark, non-affiliated institutions will pool their mortgage loans to issue covered bonds.

Euro benchmark supply will drop in 2012, covered bond analysts predict, despite the product having become the cornerstone of bank funding. Rarely have analysts’ expectations diverged so far, with issuance estimates ranging from €120bn-€190bn.

Markets stabilised on Tuesday morning following S&P’s announcement that it may cut sovereign ratings across the eurozone, ending three days of sovereign tightening. Overall the tone remains constructive, according to covered bond traders, with better buying in French and peripheral covered bonds. But with only a couple of weeks of trading to go before year end, and covered bond spreads not following sovereigns tighter, issuers are still most likely to wait for an opportunity in January.

Realkredit Danmark looks set to secure lower interest rates next year on adjustable rate mortgages after a successful week of bond auctions. Foreign investors have been marginally more active than last year in the bond sales, according to Danish brokers on the deal, confirming that Denmark retains safe haven status. Nykredit started its refinancing sale on Tuesday and will hope to emulate Realkredit's success.

Realkredit Denmark kicked off the Danish auction season on Monday, with sales in both euros and Danish kroner.

Peripheral covered bonds tightened against government debt on Monday, undoing sovereign outperformance following last Thursday’s rally. Bid offer spreads continued to widen across the board as participants remain cautious ahead of purchase programme details.