Auction of DGB Opening auction of new 10Y DGB on Wednesday 25 January. Frederik Nordsborg. Maria Holm Rasmussen 20 January 2017

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1 1 Auction of DGB 227 Opening auction of new 1Y DGB on Wednesday 2 January Frederik Nordsborg Maria Holm Rasmussen 2 January 217

2 DGB 227: Main arguments and pricing Pros (tight pricing) DKK callable covered bonds are rich in spread terms and hence duration is relatively cheap in long government bonds ASW roll potential in the maturity bucket is high ( 2 is +8bps vs 23 and 23 is at par with 21) Buy back will shift to DGB 2 when DGB 27 is classified as 1Y benchmark. This should support DGB 2 vs DGB 23 and positively impact ASW pricing of DGB 27. This is an argument for a reduced issuance premium at the opening auction 1Y DGB provide a high yield pickup vs Germany even after recent relative performance Cons (cheap pricing) Market is already long due to relatively high callable market duration. The general need for duration is low. Long 1Y flex yields a massive pickup vs new 1Y DGB at around 7bps Historically 1Y issuance has been between 7% and 7% of all new issuance in the 3 quarters following the first auction The opening auction of a new 1Y Government bond should be a success and hence Nationalbanken could potentially be willing to sell with a minor discount Neutral New Primary Dealer agreement will not impact the opening auction since it is not in place until April 217 (source) Expected pricing Duration ASW vs 6M, bps ASW diff to next (roll), bps YTM, % YTM diff to next (roll), bps Germany (MM), bps German comparable DKK Flex(MM), bps DKK Flex comparable DGB DE 4.2 4Jul DGB DE.2 1Feb27 69 Apr-27 DGB DE.2 1Feb27 7 Apr-27 DGB DE.2 1Feb27 71 Apr-27 DGB DE.2 1Feb27 72 Apr-27 DGB DE.2 1Feb27 74 Apr-27 DGB DE.2 1Feb27 7 Apr-27 DGB DE 1 1Aug2 7 Jan-26 DGB DE 2 1Aug23 71 Jan-24 DGB DE 8Oct21 2 Jan-22

3 Timing and auction details for new 1Y DGB November 227 On Wednesday 2 January 217,. per cent bullet loan 227 will be opened. ISIN: DK At the auction, the total sale will not exceed DKK billion at nominal value. The new bond will replace 1.7 per cent bullet loan 22 as key on-the-run issue. 1.7 per cent bullet loan 22 will continue as 1-year benchmark until further notice. As from 8: a.m. (CET) on the opening day, bids can be submitted until 1:1 a.m. Subsequently, a cut-off price will be fixed as quickly as possible and within 1 minutes at the latest. Bids at the cut-off price or above will be accommodated at the cut-off price. A pro-rata allocation of bids at the cut-off price may be applied. The sale will commence via MTS Denmark's auction system with primary dealers as counterparts. The opening is contingent on stable market conditions. 3

4 Chart 1: Current YTM curves DGB 227 (red dot in chart) will at expected pricing be: 28bps cheaper than the German curve At par with the Finnish curve 2bps tighter than the French curve 71bps tighter than longest DKK Flex Covered bond (Apr 27) YTM (percent) YTM: DGB vs BRD and DKK Flex Duration DGB BRD (German) DKK Flex FI Govt FR Govt 4

5 Chart 2: Current ASW curves DGB 227 on the ASW curve vs 6M Cibor and the German curve ASW vs 6M Euribor at expected pricing Bps Local ASW: DGB vs 6M Cibor and BRD vs 6M Euribor Duration DGB BRD (German)

6 Chart 3: YTM spread and Cita/Eonia DGB YTM-spreads vs Germany has generally tightened recently in line with tighter DKK/EUR OIS Bps 4 YTM spread DGB vs Germany and Cita/Eonia Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 DGB'21 vs DBR Oct'21 DGB'23 vs DBR Aug'23 DGB'2 vs DBR Aug'2 1Y Cita/Eonia (RHS) 6

7 Chart 4: DGB ASW Spreads vs Cita have generally tightened over last 12 months but widened since mid December Bps 1 - DGB vs Cita Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Spread vs swaps(6m) have generally tightened over last 12 months But widened since mid December Note the large ASW spread between DGB 2 and DGB 23 Bps DGB'23 vs Cita DGB'2 vs Cita DGB'19 vs Cita DGB'21 vs Cita DGB ASW (vs 6M Cibor) Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 DGB'23 ASW vs 6M DGB'2 ASW vs 6M DGB'19 ASW vs 6M DGB'21 ASW vs 6M 7

8 Chart : ASW roll potential Roll vs Cita in the long part of the DGB curve is elevated and hence the maturity bucket looks cheap ASW roll (vs 6M) in the long part of the DGB curve is elevated and hence the maturity bucket looks cheap Note 8bps between DGB 2 and DGB 23 Bps Cita ASW roll (over two years) Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 DGB'23 vs DGB'21 DGB'2 vs DGB'23 DGB'19 vs DGB'18 DGB'21 vs DGB'19 Bps ASW (vs 6M) roll (over two years) Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 DGB'23 vs DGB'21 DGB'2 vs DGB'23 DGB'19 vs DGB'18 DGB'21 vs DGB'19 8

9 Issuance will be concentrated in the new 1Y DGB in Q1 and Q2 In the quarters following the opening of a new 1Y DGB, issuance has historically been 7-7% of all new issuance at the auctions (DGB 2 and DGB 23) DKKbn 7 6 Auction of DGB'23 1% 9% 8% 7% In the remaining part of the 1Y bond s opening period the issuance has only been 4-% of new issuance at the auctions When DGB 23 and DGB 2 were opened DKK 4bn was sold over the first 3 quarters in each bond The issuance of DGB 23 was a bit more slow in the beginning comparing to DGB 2 but picked up after six months We expect that the primary issuance focus in Q1 and Q2 will be in 227 in order to secure benchmark status Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 percentage of total auction amount Accumulated auction amount DKKbn Auction of DGB' % % 4% 3% 2% 1% % 1% 9% 8% 7% 6% % 4% 3% 2% 1% % May-14 Aug-14 Nov-14 Feb-1 May-1 Aug-1 Nov-1 Feb-16 May-16 Aug-16 Nov-16 percentage of total auction amount Accumulated auction amount 9

10 Issuance in the first 1 days after opening of new 1Y DGB DGB 2 was faster build up than DGB 23 after opening Over first 1 days DGB 2 reached an outstanding amount of 34bn and DGB 23 reached DKK 2bn DKKbn Outstanding in the first 1 days of issuance Days DGB'2 DGB'23 1

11 Buybacks and switch operations The switch operations have been dominated by DGB 23 vs DGB 2 and DGB 18 vs. DGB 19. Going forward the switch auctions in DGB 2 vs DGB 23 will stop Going forward we expect the main buyback activity to shift to DGB 2 instead of DGB 23 DKKbn Buybacks Jan-14 Jul-14 Jan-1 Jul-1 Jan-16 Jul-16 DGB 3%21 DGB 1.%23 DKKbn DGB'23 DKKbn Switch operations Nov-14 Mar-1 Jun-1 Sep-1 Jan-16 Apr-16 Jul-16 Oct-16 Buybacks Switch 1.7%2 (sell) 1.%23 (buy).2%18 (sell) 4%19 (buy) 7%24 (buy) 11

12 Callable market duration increased and DKK portfolios are long The average callable market duration has generally increased since October DKK portfolios are hence long at the current yield level and this could potentially dampen the demand in new 1Y DGB Duration on 'DK Mtg Callable'-index 1 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 On the other hand callable covered bonds spread have tightened significantly since mid December and the pickup vs government bonds (and swaps) is reduced This could increase the demand for long government bond duration OAS, bps '47 vs swaps and govt Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec '47 swapoas (vs 6M) 2'47 GovtOAS

13 Thank you! Nordea Markets is the commercial name for Nordea s international capital markets operation. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Frederik Nordsborg Head of Rates Strategy Denmark frederik.nordsborg@nordea.com Maria Holm Rasmussen Assistant Analyst maria.holm.rasmussen@nordea.com Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.