Foreign investors have recently increased their holdings in Swedish secured bonds, which we commonly refer to as mortgage bonds.
The total holdings of international players are now back up to around 500 billion Swedish kronor, after dropping to as low as 200 billion during the pandemic.
Foreign investors typically favor Swedish mortgage bonds.
“They are perceived as high-quality fixed-income products for those seeking Swedish interest rate exposure,” says Robert Bergqvist, Senior Economist at SEB. According to him, mortgage bonds are seen as an alternative to government bonds.
### Factors Influencing Foreign Investors
Robert Bergqvist points out that there are several parameters influencing foreign investors’ willingness to invest.
“They look at the size of the economy, the labor market conditions, where interest rates are heading, and household debt levels,” says Robert Bergqvist.
However, Robert Bergqvist also believes that foreign investors use somewhat simplistic parameters in their analysis of the Swedish interest rate market.
“But it’s important to remember that global investors do not have the capacity to dedicate extensive analysis resources to what’s happening in Sweden.”
In conversations with foreign investors, Robert Bergqvist has previously noticed concerns about rising interest rates and the highly leveraged Swedish households. However, as the central bank lowers interest rates, those concerns have diminished.
Decreasing unemployment and increasing real wages also lead to more stable households, according to Robert Bergqvist. This, in turn, creates a better market for secured bonds.
### Riksbank’s Impact on the Market
The market for mortgage bonds amounts to over 2 trillion Swedish kronor, or approximately 50% of the Swedish bond market. This makes it larger than both the government bond market and corporate bond market.
Due to its size, the mortgage bond market typically has good liquidity, meaning it is easily traded. It is this liquidity – the ease of buying and selling bonds – that makes them attractive.
Robert Bergqvist notes that investors’ interest in Swedish mortgage bonds has been influenced by the fact that the Riksbank bought up a significant portion of the outstanding volumes.
“As an investor, you don’t want to hold a security with poor liquidity.”
During the pandemic, the Riksbank aimed to ensure that the credit system had enough liquidity. The proper functioning of the financial system is a prerequisite for the Riksbank to carry out its monetary policy mandate.
One measure was to purchase mortgage bonds on the market.
The acquisitions of mortgage bonds were carried out between March 2020 and December 31, 2022.
In November 2021, when Riksbank’s holdings of mortgage bonds were at their highest, they amounted to 419 billion Swedish kronor.
In essence, about 20% of all mortgage bonds in the market.
According to the stability council’s mapping of the bond markets, turnover on the market hit historically low levels in 2022.
### Riksbank’s Market Impact – Again
Starting in 2023, the Riksbank has not purchased any mortgage bonds, and by September of this year, the holdings were down to 209 billion Swedish kronor.
The cautious approach of international investors even after the pandemic may be due to the surprise of central banks’ shift towards tightening monetary policy to combat inflation, like other investors.
The increased liquidity for mortgage bonds is also driven by the fact that the Riksbank, as part of its inflation-fighting efforts, is now trying to reduce the money supply in the market.
Banks’ response might be to issue more mortgage bonds to secure their financing, according to a recent report from the Riksbank.
Afv has reached out to the Riksbank and the Financial Supervisory Authority for comments on the article.