Nordea Hypotek is set to introduce a new long covered bond (NDH5531) that will mature on 8 April 2022. The coupon rate is set to 1% and the ISIN code is SE0006991246. The loan will be introduced in the coming days, depending on market conditions.
Despite the ever-lower rate environment, spreads between government bonds and covered bonds have remained at relatively elevated levels. With all government bonds shorter than 5Y now trading below freezing point, we would expect investors to gradually shift to covered bonds. We would expect higher yielding longer maturity covered bonds to benefit the most. Moreover, as we are approaching the implementation date of the new amortisation requirement for mortgage loans, we would expect credit growth to peak soon. In our next portfolio update, we are leaning towards increasing the share of covered bonds.
Pricing
We assume that all curves are correctly priced and that the new loan will in due time reach benchmark status. Pricing is done with closing prices as of 14 April 2015. Given these considerations, we think that a fair mid-pricing for NDH5531 is 35-36bp above NDH5521. The chart below shows the pricing (35.5 bp above NDH5521) relative to other bonds in TRUE ASW terms.. The bond pays a lower coupon compared to bonds with a similar maturity. As the chart reveals, the market does not seem to fully take coupon size into consideration but tends to focus more on Matched maturity pricing – see chart on next page. In matched ASW terms the pricing of NDH5531, on the contrary, looks slightly cheap. We think a reasonable trade-off given current pricing would be NDH5531 35-36bp above NDH5521.
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