Migration-Fueled Swedish Bond Blowout Reverses Amid Supply Balm

  • Biggest banks see debt office lowering borrowing forecast
  • Yield spreads versus Germany narrow after December widening

Concerns the record influx of refugees would blow a hole in the Swedish budget may have been exaggerated.

Sweden’s biggest banks predict the debt office will on Wednesday lower its borrowing forecasts for this year and 2017 as a surging economy spurs rising tax income.

That comes after Swedish bond spreads ballooned in December amid concern finances were being overwhelmed by a record inflow of refugees from war-torn nations such as Syria and Afghanistan. The country, which has seen more asylum seekers per capita than any other European Union nation, has since erected border controls and said it may reject half the 160,000 people that arrived last year.

“Fears about government finances are overdone,” said Michael Grahn, an analyst at Danske Bank A/S in Stockholm. “We’ve seen an underlying trend towards improving government finances as tax revenue has increased because of the strong economy. On top of that, the government’s recent efforts to curb immigration mean spending will probably be a lot lower than we feared just a few months ago.”

At the height of the crisis, the spread or difference in yield between Swedish 10-year and Germany 10-year bonds ballooned to 50 basis points. It has since narrowed to about 30 basis points.

Swedish economic growth has accelerated for four straight quarters to 3.9 percent in the three months through September. Unemployment has fallen to 7 percent from 7.8 percent in the last year as the central bank has cut interest rates deep below zero to a record minus 0.5 percent. At the same time, the central bank is also in the midst of a bond buying program that targets purchasing about a third of the bond market by the end of June. This month it said that it will reinvest maturities and coupons from its bond portfolio and that it may also start buying inflation-linked government notes .

Despite cutting its borrowing forecast, Swedbank predicts the debt office will keep its bi-weekly issues of nominal government bonds at 4 billion kronor, partly to address the growing liquidity problem triggered by the Riksbank’s asset purchases.

Looking beyond just 2016 and 2017, “there will continue to be a lot of uncertainty surrounding government finances,” according to Swedbank analyst Knut Hallberg.

“If integration of immigrants continue to be as poor as it’s been historically, there’s a risk that government spending will increase a lot and that growth will slow,” he said “Public finances could then end up in a really tough situation.”

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