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MNI PREVIEW: Riksbank Faces Bond Reinvestment Predicament

-Riksbank To Signal Gentle Rate Hikes But Approach To Bond Reinvestment Could
Add Stimulus
By David Robinson and Tim Davis
     LONDON (MNI) - The Riksbank is considering a revamp of its management of
its bond portfolio, to avoid draining an already illiquid secondary market and
inflating its balance sheet at a time when it is projecting rate hikes.
     Quantitative easing has left the Riksbank with a large chunk of a shrinking
market for Swedish government bonds, with official forecasts showing budget
surpluses and debt fading to below 35% of GDP this year, despite pressure on the
coalition government to maintain issuance.
     Its holdings of non-linker Swedish government bonds (SGBs) amount to SEK317
billion, 49% of total outstanding stock, according to figures supplied by the
bank. The SEK62.609 of the 5% December 2020 bond on its books equate to 65% of
those securities in circulation. If the Riksbank were to follow its current
policy of full, early investment of maturing debt in the case of the 2020, it
would raise its holdings of non-linkers to around 60%.
     A bank survey has already found that a majority of market participants
believe bond liquidity is poor as a result of the purchases by the Riksbank. At
its April meeting next Thursday it will reveal whether it plans to reinvest the
2020 holding early in line with existing policy or change tack.
     Board members may well split over the best approach to reinvestment.
     Deputy Governor Martin Floden has previously advocated a gradual run down
of the bank's debt pile, saying in a 2018 speech that "that the best way of
winding down the bond holdings with as little market influence as possible is to
hold the bonds in the portfolio until they mature."
     The alternative approach has been to make piecemeal decisions as large
redemptions loom depending on conditions at the time.
     A compromise, which some investors think will be adopted, is for the board
to sanction reinvestment of a fraction, say a third or a half, of its holdings
of the December 2020 bond while outlining its approach to future principal
payments.
     When the bank's net asset purchases ended in December 2017 it opted to
reinvest principal payments and coupons with the large principal payments due in
the first half of 2019 spread evenly between January 2018 to June 2019. The
upshot is that its holdings of government bonds rose temporarily in 2018 and
have continued to increase in early 2019.
     The board's decision on the key policy rate will, in contrast with the
decision on bond reinvestment, be straightforward, with all members looking set
to back no change, leaving the rate at -0.25%, which it reached following the
December 25 basis point hike.
     The updated collective rate forecast could well support the view that the
next hike will probably happen in the second half of this year although downside
risks are likely to be highlighted and the board is again more than likely to
split over the outlook. One downside risk could come from the release of the
seasonally-adjusted unemployment rate, which came in at its highest level since
October 2017, although this was distorted by a sharp increase in the size of the
labour force.
     Deputy Governor Per Jansson entered a reservation against the December rate
hike and collective rate path, arguing for caution due to doubts over whether
stronger inflation would persist and concerns over external risks. He looks
unlikely to have changed his mind.
--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com
--MNI London Bureau; +44 203 865 3806; email: tim.davis@marketnews.com
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: MT$$$$,MX$$$$]

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