Weekly Focus
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Uncertainty ahead of Flex auctions
Fri, Nov 28 2008, 15:13 GMT
by Danske Research Team
Until last week, things looked rather bright for F1 borrowers (mortgage loan with interest rate reset every year). F1 rates had fallen sharply in the wake of the Danish central bank (DN) and the FSA introducing a stability package for the L&P sector on 28 October. Recently, however, uncertainty has once again been on the rise with respect to the "Flex" auctions, which kick off next week. F1 rates have risen al-most 0.6 percentage points over the past week.
Some of the uncertainty arises from the expected supply at the auction. The latest figures from Realkredit Danmark (RD) indicate a total supply of F1 bonds of DKK 265-280bn if the other institutions follow the pattern at RD. The figure is somewhat higher than our initial estimates, and is due to many borrowers undertaking a profile shift down into F1 from F3 and F5. In addition, there have also presumably been borrowers who have switched from a 30-year callable loan to an F1 loan in order to reduce their remaining debt.
On top of this, the Danish krone has weakened and remains somewhat below the central parity of 7.46038. This has cooled expectation of DN narrowing the key rate spread ahead of the auctions in December.
Last but not least, there is considerable focus on the dete-rioration in bank balance sheets, as banks are natural buy-ers of the non-callable Flex bonds. Hence, weaker bank bal-ance sheets can very well mean less demand at the auc-tions, with higher Flex mortgage rates as a result.
Thus uncertainty remains high on where F1 interest rates will settle - just a week ahead of the auction. This is essen-tially due to the very large fluctuations seen in the market - both with respect to the scale of the expected rate cuts from the ECB, and also whether DN will opt to follow suit. Fur-thermore, a possible new bank package in Denmark could also sift sentiment significantly..
Published on Fri, Nov 28 2008, 15:13 GMT
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