An improved algorithm for calculation of the reference spread for bonds in the non-callables sample (DKNC) has been released. The spread is shown in the field Ref OA Spread* (FID 367 in the DMBS Display Template).

The DKNC sample contains bullet bonds used in the funding of Danish adjustable rate mortgage loans (rentetilpasningslån). Previously, the same reference spread was assigned to all DKNC bonds but the emergence of significantly more bonds of this type over the last couple of years has enabled a refinement of this approach.

The liquidity in the DKNC bonds is quite high and this enables a subdivision into smaller groups each assigned its own reference spread. The DKNC sample has been divided into nine subgroups based on coupon rate and time to maturity all having sufficient liquidity for calculation of a reference spread. This means that each group on each tradedate has at least three bonds with an official quote from OMX Copenhagen.

For DKNC bonds with a 4 % coupon rate a reference spread is calculated within the following groups of time to maturity: 1, 2, 3, 4, 5, and 6+ years. For RTL bonds with a 2 % coupon rate reference spreads are calculated for the following times to maturity: 1, 2, and 3+ years. The reason why bonds with longer maturities are pooled is that we want to ensure that there is enough bonds with an official price in each subgroup. We will monitor the liquidity in each subgroup and the division of the bonds might be redefined in the future based on our observations.

* Notice, that since these bonds are non-callables the Ref OA Spread is not an option adjusted spread but a simple quote spread, i.e. the spread which should be added to the swap yield curve in the discounting of the cash flow to match the quote of the bond.