Foreign investors have recently increased their holdings in Swedish secured bonds, commonly known 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.
Typically, foreign investors favor Swedish mortgage bonds. “They are perceived as high-quality interest rate products if you want Swedish interest rate risk,” said Robert Bergqvist, senior economist at SEB Bank. According to him, mortgage bonds are seen as an alternative to government bonds.
There are several factors that influence the investment appetite of foreign investors, according to Robert Bergqvist. “They look at the size of the economy, the labor market situation, where interest rates are heading, and household indebtedness,” said Robert Bergqvist.
However, Robert Bergqvist also believes that foreign investors use rather simplistic parameters in their analysis of the Swedish bond market. “But one must consider that global investors do not have the opportunity to invest too much in-depth analysis resources on what is happening in Sweden.”
In discussions with foreign investors, Robert Bergqvist has previously noticed concerns about rising interest rates and highly leveraged Swedish households. However, as the Riksbank lowers interest rates, those concerns have diminished.
Decreasing unemployment and increasing real wages also contribute to more stable households, says Robert Bergqvist. This, in turn, creates a better market for secured bonds.
The market for mortgage bonds encompasses over 2000 billion kronor, accounting for approximately 50% of the Swedish bond market. Therefore, it is larger than both government bonds and corporate bonds markets.
Due to its size, the mortgage bond market typically has good liquidity, meaning easy tradability. This liquidity, among other factors, makes them attractive to investors.
According to Robert Bergqvist, investors’ interest in Swedish mortgage bonds has been affected by the fact that the Riksbank has purchased a significant portion of outstanding volumes. “As an investor, you do not want to hold a security with poor liquidity.”
During the pandemic, the Riksbank aimed to ensure that the credit system had sufficient funds. The 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 purchases of mortgage bonds were conducted between March 2020 and December 31, 2022. In November 2021, when the Riksbank’s holdings of mortgage bonds were at their highest, they amounted to 419 billion kronor, roughly 20% of all mortgage bonds in the market.
A stability council survey of the bond markets showed that market turnover reached historically low levels in 2022.
Starting in 2023, the Riksbank has not purchased any mortgage bonds, and by September of that year, the holdings were down to 209 billion kronor. Some analysts believe that the caution of international investors post-pandemic may be due to central banks’ surprise shift towards monetary tightening to combat inflation.
The increased liquidity for mortgage bonds is also boosted by the fact that the Riksbank, as part of its inflation-fighting measures, is now seeking to reduce the money supply in the market. In response, banks may issue more mortgage bonds to secure their financing, according to a recent report from the Riksbank.
Afv has reached out to the Riksbank and Finansinspektionen for comments on the article.