Sweden’s biggest issuer of local government bonds is warning the central bank of the consequences of potentially expanding its unprecedented asset purchases into municipal debt.
Any move to expand into municipal debt could risk crowding out important investors from the local government bond market by pressing down yields, said Bjoern Bergstrand, head of media relations at Kommuninvest. The company helps close to 95 percent of Sweden’s 290 municipalities borrow funds in the capital markets.
“It can seem attractive that borrowing costs fall further but there are more long-term overarching effects that may not be so positive,” he said. “It’s enormously important that you as a borrower have a diversified base of investors who buy your bonds and who are available at all times.”
The Riksbank has repeatedly warned it may expand its government bond buying program into other assets amid concern it’s distorting the functioning the market. Deputy Governor Martin Floden on Friday said the Riksbank is “a little bit concerned” about liquidity in the government bond market. The central bank expects to have bought about 40 percent of the outstanding government debt by the end of the year.
Fellow Riksbank board member, Per Jansson, on Thursday said that expanding the program into mortgage bonds would be problematic since it would fuel an already red-hot housing market. He highlighted corporate and municipal bonds as other options.
But according to Bergstrand, it’s not clear that buying municipal bonds will do the trick since the market is much smaller than that for state debt and mortgage bonds. He declined to comment on whether Kommuninvest has been approached by the Riksbank but said he thinks that the bank is “very well aware of the factors that I’m highlighting. In other words, how many bonds are out there, what kind of effect can it have?”
Kommuninvest’s local currency bonds of 185 billion kronor account for more than half of total local and regional debt. That compares with about 800 billion kronor in government bonds and 1.3 trillion kronor market in local currency mortgage bonds.
The Riksbank’s Jansson last week said the bank will do all in its power to safeguard the credibility of its inflation target, which it has failed to meet for almost half a decade. But according to Kommuninvest’s Bergstrand expanding asset purchases may not have the desired effect.
“If you look globally at the asset purchasing programs that have been launched they have only been moderately successful at fueling inflation,” he said. “It’s also happened at the cost of there being a lot of assets on the central banks’ balance sheets.”
Bergstrand also said that Riksbank purchases of municipal bonds could endanger local government autonomy, a key feature of the Swedish system. The Riksbank is an authority under the national parliament.
“The idea is that municipalities should take care of their own funding, either through tax revenue or external borrowing, and if the state becomes a very big buyer you end up in a situation where the state at least partly would fund the local governments,” he said. Local governments “are managing their external funding in a very effective way, for example through us. It’s a model we believe is worth safeguarding,” he said.