The man in charge of managing Sweden’s state debt signaled the Riksbank may soon be reaching the limits of its government bond purchase program amid signs that liquidity is suffering.
“What we’re saying to the Riksbank is that the market is functioning quite well, but that there are risks, looking ahead,” Thomas Olofsson, head of debt management at the Swedish National Debt Office, told Bloomberg.
Riksbank First Deputy Governor Kerstin af Jochnick said last week the bank is probably approaching a limit for how much more in government bonds it can buy. The comments narrowed spreads in the municipal bond market, while government yields rose.
“I have no objection to Kerstin af Jochnick’s reasoning on these issues,” Olofsson said. “If I had thought her reasoning was wrong, I would say so.”
Af Jochnick said the Riksbank could “technically” buy covered bonds, corporate or municipal bonds if needed, as part of its mandate to reach a 2 percent inflation target. The bank has had a negative policy interest rate since February last year.
Monetary policy in Sweden has failed for almost half a decade to drive inflation back to target. The bank this year extended its QE program, targeting about 37 percent of nominal government debt by the end of 2016 and about 9 percent of inflation-linked state paper.
According to Olofsson, one sign that liquidity has deteriorated since the Riksbank started buying bonds two years ago is the decline in volumes for given spreads. There has also been an increase in the number of re-sellers over the summer that have had to ask the debt office for help to deliver government bonds to investors through repo transactions.
“It will be interesting to see during the autumn if we will have to continue to do repos of the present volumes, because that would possibly be an indication that the market isn’t functioning as well as before,” he said.
The Riksbank’s asset purchases have helped push Swedish yields down to historic lows. But Olofsson said he currently sees no reason to issue a 30-year bond since investors haven’t expressed an interest. He said interest rates on outstanding bonds maturing in more than 10 years would have to decline for the debt office to actively ask the market whether there’s enough demand for such bonds.
“We need to focus on maturities that create the foundations for a liquid market and in that context we must focus on ten-year bonds,” he said. “We don’t have the borrowing need required to issue bonds with a lot of different maturities.”
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To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net. To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Tasneem Hanfi Brögger
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