Merrill’s O’Neill Says Peripheral Dump Buoys Nordics
Investors dumping bonds from Europe’s most indebted governments are turning to fixed-income markets in Sweden, Finland, Norway and Denmark for shelter, said Bill O’Neill, chief investment officer for Europe, the Middle East and Africa at Merrill Lynch Wealth Management.
“There’s such a focus on policy flexibility” and “the ramifications for the peripheral countries of dealing with a one-size-fits-all interest rate and a single currency,” O’Neill said in an interview in Helsinki yesterday. “When you contrast those, money is flowing towards the Nordic market.”
The divide between Europe’s low-deficit, trade-surplus economies and nations submerged in the region’s debt crisis is forcing investors to rethink their strategies, O’Neill said. Governments free from austerity constraints and economies with flexible currencies will attract capital as they outperform laggards facing structural overhauls, he said.
“Investors are seeing the visibility in northern Europe and are willing to shift allocation towards these markets,” O’Neill said. Though Nordic bond markets are small compared with their German counterpart, “the issue of illiquidity in these markets is just one factor in a whole series of factors, the balance of which are supportive to offshore inflows,” said O’Neill, who helps manage $1.5 trillion in assets globally.
The difference between the yield on Sweden’s 10-year benchmark bond and same-maturity German bunds was 22 basis points today, compared with 34 basis points at the end of December, according to data available on Bloomberg. The 10-year yield spread on Finnish debt to bunds narrowed to 20 basis points today from 28 at the end of November. The equivalent spread for Portugal was at 391 basis points, versus a December low of 302.
Denmark sold 6.2 billion kroner ($1.13 billion) of 2021 bonds today at an average yield of 3.33 percent, after receiving offers for 9.82 billion kroner, the central bank said today. The government also sold 730 million kroner of 2013 notes at an average yield of 1.62 percent, after receiving offers for 3.81 times that amount, the bank said.
Danish 10-year debt yields 3.11 percent on the secondary market, about half a basis point less than same-maturity German debt.
“There is still solid demand for Danish government bonds despite the tremendous performance seen over the last couple of weeks,” said Gustav Smidth, a senior analyst at Danske Bank A/S in Copenhagen, in a note to clients today. “We still expect performance in the bonds to continue to be driven by strong domestic and international demand.”
Sweden, Denmark and Finland will post budget deficits that are smaller than the euro area’s average shortfall of 4.6 percent of gross domestic product this year, the European Commission estimates. Norway will post a surplus close to 13 percent of GDP, according to the Finance Ministry.
Sweden, the biggest Nordic economy, and Finland, the region’s only euro member, are riding an export boom that will deliver growth rates of about 3 percent this year, O’Neill said. Sweden’s output may expand as much as 3.5 percent, he said. The 17-member euro area, by comparison, will grow 1.5 percent on average in 2011, the commission said on Nov. 29. Germany will expand 2.2 percent, it said.
Sweden last year delivered the biggest economic rebound in the 27-member European Union, expanding 5.5 percent. The central bank has already raised borrowing costs four times since July, bringing the benchmark repo rate to 1.25 percent last month. Central bank Governor Stefan Ingves said then more increases are needed to steer the recovery. GDP will expand 4.4 percent this year, the bank estimates.
The central bank of Norway, the world’s seventh-largest oil exporter, plans to start raising interest rates in the middle of the year, it said last month. Norway’s mainland economy, which excludes revenue from oil and shipping, will expand 3 percent this year and next, the bank estimates.
It’s cheaper to insure against a default in Norway, Sweden, Finland and Denmark than it is in Germany, credit-default swaps show. The CDS on Swedish five-year debt was 33 basis points yesterday, compared with 55.6 on similar-maturity German debt, according to prices provided by CMA data and available on Bloomberg. The CDS on Greek five-year debt was at 844.6 yesterday.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros ($13.6 million) of debt from default for five years is equivalent to 1,000 euros a year.
“At some point Greece or Ireland may become interesting to investors,” O’Neill said. “Right now, these markets are impossible for money to actually move into.”
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