Sweden Taps EU’s Lowest Yields to Lock In 30-Year Funding

Sweden is tapping the European Union’s lowest bond yields to extend its funding maturities as the largest Nordic economy takes advantage of its haven status amid a worsening debt crisis in the euro area.

“Sweden’s top of the class and when one flees risk, one is willing to accept low yields,” said Christer Kaeck, who manages the $800 million DnB SEK Long Bond fund at DnB Asset Management in Stockholm. “We’ll see increased demand and that makes it smart for the debt office to secure future borrowing needs.”

Investors are flocking to AAA rated Sweden, where the government has reduced its debt burden since the global financial crisis started in 2007, and will post a budget surplus this year and next. As Europe’s crisis spreads to Italy, the third-largest euro economy, nations with small, shrinking debt loads are enjoying an unprecedented surge in investor demand.

Sweden, which has stayed out of the euro since joining the European Union in 1995, announced a plan this week to raise borrowing in longer maturities as long as 30 years by 50 percent. Over 10 years, Sweden now pays less than Germany to borrow. It boasts the lowest yields in Europe after Switzerland and the region’s best performing bonds this year.

“Investors want safe investments when it gets stormy and they’re seeing Swedish bonds as such,” said Per Franzen, deputy director at the finance ministry. “Public finances are very stable but we want to increase the robustness of the debt.”

Testing Demand

Sweden today sold 1 billion kronor ($148 million) of bonds maturing in March 2039 and 1 billion kronor in 2022 notes. It got a bid-to-cover ratio of 1.58 on its 2039 debt and 1.93 on its notes maturing in June 2022. By contrast, Germany got a 1.1 bid-to-cover ratio on a 30-year bond sale in October.

The Swedish debt office on Nov. 14 said it plans to gradually increase issuance in maturities of more than 12 years to 60 billion kronor from about 40 billion kroner.

Sweden will post a 0.9 percent budget surplus of gross domestic product this year as debt dwindles to 36.3 percent of GDP, the European Commission said on Nov. 10. The average debt load in the euro area will swell to 88 percent this year, according to the commission. Sweden’s economy, home to companies such as wireless network maker Ericsson AB and appliance maker Electrolux AB, will expand 4 percent in 2011, more than twice the 1.5 percent rate in the euro area.

‘Major Recognition’

“We’ve seen a rising number of foreigners interested in Swedish bonds,” said Roger Josefsson, chief economist at Danske Bank A/S in Stockholm. “And it’s not just anyone: it’s not money market funds, it’s foreign-currency reserves and the like. This simply suggests a major recognition of Swedish public finances.”

Sweden’s 30-year bond yields 2.12 percent, versus 3.07 percent for the U.S. and 2.47 percent for Germany. By comparison, France’s 30-year debt yields 4.36 percent, Italy’s 7.28 percent and Spain’s 6.68 percent.

The spread, or difference in yield, between the Sweden’s 30-year bond and German debt with a similar maturity narrowed to 31 basis points today from 39 basis points.

Foreigners’ holdings of krona-denominated Swedish government bonds have risen to 381 billion kronor in September from 275 billion kronor in November 2009, according to the Swedish statistics office.

‘The Finest’

“Swedish and German bonds, in that order, will be the finest the market will want if the worst comes to pass,” said Kaeck. “Sweden has become an alternative for many international investors who need a AAA rating.”

Sweden has reduced its debt burden after selling state assets and as the government, led by Prime Minister Fredrik Reinfeldt, was able to avoid costly bank bailouts that have weighed on the finances of European peers such as the U.K.

“The risks associated with lending money to Sweden are extremely small,” Thomas Olofsson, head of debt management at the National Debt Office, said in a Nov. 14 phone interview. The government is seeking to “safeguard” itself by locking in borrowing over a longer time frame, he said.

Sweden will increase longer-maturity borrowing as it repurchases shorter-maturity notes to coincide with an overall decline in the nation’s debt-burden. The government expects outstanding debt to decline to 850 billion kronor in 2015, or 21 percent of GDP, from today’s 1.1 trillion kronor.

Bank Failure

Sweden dealt quickly with its only bank failure since the financial crisis started four years ago. The state seized Carnegie Investment Bank in November 2008 and then resold it three months later for 2.3 billion kronor, recouping the original state loan. Sweden’s bank guarantee program, which backed as much as 1.5 trillion kronor in obligations, will bring in a 5.8 billion-krona profit when the loans expire in 2015, the nation’s debt office said in August.

Since coming to power in 2006, the Reinfeldt’s government has cut its stake in Nordea Bank AB and sold Vin & Sprit AB, the maker of Absolut vodka, property company Vasakronan AB, part of stock-market operator OMX AB and some of its holding in TeliaSonera AB. Sweden has shelved plans to sell more as market turmoil continues, Reinfeldt said this month.

The government will steer policy to avoid deficits and allow itself “room to maneuver” should the crisis in Europe require more stimulus, Finance Minister Anders Borg has said.

“Public finances are in good condition, we have a small government debt and the state has the muscle to help,” said Danske Bank’s Josefsson. “I share Borg’s opinion that there are so many big downside risks so it’s better to save ammunition until it’s really needed.”

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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