Citigroup Sees QE Pause in Sweden as Liquidity Concerns Mount

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Sweden’s Riksbank is likely to slow the pace of bond purchases in the coming months as liquidity dries up over the summer, Citigroup Inc. and Nordea Bank AB said.

Doing so could prolong the Riksbank’s quantitative easing program until September; if QE continues at the current pace, it will end in the first week of August, Citigroup says.

As markets turn their focus to liquidity, the Riksbank has already hinted “it could stop its QE program completely, or at least slow it down, during the summer due to lower activity in the market,” Martin Enlund, chief analyst at Nordea Markets, said by phone. “The question is by how much, and what effect that might have on the krona.”

The Riksbank is targeting about $10 billion in government bond purchases as it tries to revive consumer-price growth after months of deflation. That’s about 14 percent of the market or 3 percent of Sweden’s gross domestic product. Any efforts to expand asset purchases would deplete Sweden’s already limited sovereign debt supply, SEB AB and Danske Bank A/S have said.

“We suspect that the Riksbank is planning to reduce the speed of purchases in the summer months, when liquidity tends to be significantly less,” Guillaume Menuet, a senior economist at Citigroup in London, said in a note. “Alternatively, it could announce an extension,” which would “reduce uncertainty in the market,” he said.

Absorbing Issuance

Government bond purchases to date have brought the Riksbank’s holdings to 10.2 percent of the outstanding nominal amount, according to Citigroup. That may rise to 26 percent at the end of 2015 if the Riksbank limits QE to government bonds and extends the program, Swedbank AB said. The Riksbank has so far bought bond volumes almost twice the size of the net issuance from Sweden’s debt office, according to Nordea.

The bank has also struggled to keep pace with the European Central Bank’s much larger QE program, which has had ramifications for the exchange rate.

Pausing Riksbank bond purchases over the summer could lead to an appreciation of the krona, Nordea said.

“If QE is paused or slowed in July, that could lead to yields on 10-year Swedish bonds rising a bit vs German bonds, if we get another international rise in yields,” Enlund at Nordea said. The euro-krona exchange rate has tended to move with the 10-year spread against Germany over the past quarter, “so this would be krona-positive, even if you do not believe in the effects from QE flows,” he said.

Riksbank Deputy Governor Martin Floden said on June 22 that the central bank is monitoring the spread between Swedish and German bonds. Policy makers have also noted that the krona has strengthened recently, he said. The bank will take the development into account at its meeting on July 1, he said.

He also said that the krona is “a bit stronger than the Riksbank’s forecast.”

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