MNI INTERVIEW: Riksbank QT Boosts Bond Market - Debt Head

Accelerating asset sales by the Riksbank are boosting market liquidity with no sign that bond yields are being driven sharply higher, the Swedish National Debt Office’s head of debt management told MNI.

"We think it's positive that the Riksbank is now selling off parts of their portfolio to increase the amount of free-float of government bonds. We think it will lead to improved market functioning," the Riksgalden’s Klas Granlund said an interview.

"An increased free-float will bring about better market liquidity. But I think there might be a point in time where we have saturated the demand at these types of price levels, so the price would need to adjust. But given the kind of cover ratios seen at our auctions which are three, four ... we even saw a seven bid-to-cover ratio ... I think we're pretty far away from that point."

Liquidity still has room to improve, he said, noting that the average grade assigned by market participants in an NDO survey was still below three on a scale of one to five, though he declined to say whether he thought that the central bank could accelerate quantitative tightening further. The central bank said on Feb 1 that it was increasing the pace of sales of its government bonds to SEK6.5 billion a month from SEK5 billion, with Governor Erik Thedeen stating that normalisation of the Riksbank’s balance sheet aided debt markets. (See MNI INTERVIEW: Riksbank Eyes Krona In Dovish Shift-Governor)

FOREIGN CURRENCY ISSUANCE PRICEY

The NDO's new forecast for Sweden’s 2024 budget deficit released together with its new borrowing plans last Thursday was SEK84 billion versus SEK49 billion previously, largely due to a SEK40 capital injection required by the Riksbank to cover losses stemming from the asset sales. The final amount required has still to be set by parliament, so the NDO used the Riksbank's own estimate of SEK40 billion. (See MNI INTERVIEW:Sweden Likely To Borrow To Cover Riksbank Losses)

"Last year we kind of suspected something would come, but we couldn't plan for it ... Now at least we know what the Riksbank's views are on it, but it's up to the parliament to decide,"" Granlund said,

Sweden keeps a tight rein on borrowing, with a fiscal framework including a surplus target and a cap on central government and pension expenditures.

“It has proved to be quite resilient over many years, despite having a pandemic, a financial crisis, a euro crisis ... The government debt is now basically the same size in nominal terms as it was in 2002," Granlund said.

January saw the syndication of a new two-year USD bond but the NDO plans to cover the increase in its borrowing plans with domestic, rather than foreign-currency denominated, issuance..

"Foreign bonds are from a funding cost perspective currently not competitive, really we're paying some sort of insurance premium to maintain this type of issuance," Grandlund said. "We want investors to recognise our name and that's why we try to come to the market every other year.”