Swedish Bonds Retrace Gains Against Germany
Swedish bonds underperformed benchmark German debt as investors scaled back bets that the Nordic nation is safer than the euro region’s biggest economy.
The difference between the two countries’ 10-year borrowing costs crossed parity today, the first time since September that Sweden has paid more than Germany to borrow for a decade. Sweden paid as much as 64 basis points less than Germany for 10-year loans in November. The Nordic country’s 3.5 percent note due 2022 yielded 1.87 percent as of 9:26 a.m. in Stockholm, compared with 1.86 percent for similar-maturity German bunds.
“In a period of diminishing concern over a collapse” in the euro region, “there’s less need to hold Swedish bonds, especially since they have been rather expensive to Germany,” said Claes Maahlen, head of trading research at Svenska Handelsbanken AB in Stockholm. Pressure will continue as long as “risk appetite is good,” he said. Sweden’s borrowing costs are unlikely to rise “dramatically” versus Germany, he said.
Risk appetite has returned to Europe, in part after the European Central Bank unleashed 489 billion euros ($638 billion) in three-year loans to banks in December, funds that were in turn funneled into bonds sold by Europe’s most indebted nations including Italy and Spain.
European leaders have agreed to bring forward to July the introduction of a 500 billion-euro permanent bailout fund as euro-area members dispatch 150 billion euros to the International Monetary Fund.
Sweden Vs Italy
Sweden’s spread to Italy has narrowed to 374 basis points from as wide as 564 basis points in November. Sweden’s Finance Minister Anders Borg said on Jan. 27 that Italy’s Prime Minister Mario Monti has been a “game-changer” in recognizing the need for structural reforms.
Investors had flocked to AAA rated Sweden, where government debt has shrunk every year since 2009 and the budget is in surplus, to escape the fiscal crisis in the euro region. Sweden, which has stayed out of the single currency since joining the European Union in 1995, boasted the region’s best performing debt maturities of more than 10 years in 2011.
Sweden will post a 0.7 percent budget surplus of gross domestic product this year as debt dwindles to 34.6 percent of GDP, the European Commission said on Nov. 10. The average debt load in the euro area will swell to 90.4 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 1.4 percent in 2012, more than twice the 0.5 percent rate in the euro area, according to the commission.
Signs that Europe’s crisis may be abating have also prompted investors to scale back predictions for rate cuts in Sweden. Interest rate futures show traders expect the central bank to lower its benchmark rate to 1.15 percent by December 2012. At the end of last year, traders bet the rate would fall as low as 0.75 percent.
Sweden’s central bank in December cut its rate by a quarter-point to 1.75 percent, the first reduction since 2009, to protect the economy from the fallout of the debt crisis. The bank cut its forecast for economic growth this year to 1.3 percent and estimated growth will be 2.3 percent in 2013.
Still, investors may be underestimating the implication the economic slowdown will have for bond issuance, Maahlen said.
Sweden’s debt agency said in October it will issue 35 billion kronor in nominal government debt this year, up from a May forecast of 22 billion kronor. The agency issues a new forecast on March 6.
“The supply bit hasn’t entered the mindset yet,” Maahlen said. “In the second half we will see more supply in Sweden and a raised borrowing need forecast from the debt office. It will be significant.”
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