RPT-MNI PREVIEW: Hawkish Riksbank May Revamp Bond Buying

-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; +44 203 865 3829; email: jason.webb@marketnews.com

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