(Bloomberg) — Sweden’s latest proposal to reform its illiquid credit market is doomed to fail.
That’s the verdict of the head of fixed-income at Alecta, one of the country’s biggest pension managers with $130 billion in assets.
The Swedish corporate bond market came to a standstill during a pandemic-induced selloff early last year. More than 30 credit funds were forced to halt redemptions as they fought back the panic that ensued when investors realized just how illiquid their holdings really were. The solution, according to the Swedish financial watchdog, was to let the industry come up with its own fix.
But that fix — the daily publication of aggregate transactions — won’t do the trick, according to Tony Persson, who oversees Alecta’s bond and currencies portfolio from Stockholm. That’s because the focus on transparency fails to address the underlying issue that the secondary market is simply too shallow to remain liquid during a crisis.
“Do I think things will get better now? No, because there is a built-in challenge with a market that has a small turnover in relation to the outstanding stock of bonds,” he said in an interview.
“If you think adding post-trade price information solves the Swedish bond market’s inherent challenge, you are at best naive,” he said.
With companies as big as Volvo AB and Electrolux AB issuing debt in kronor, Sweden’s failure to address the shortcomings in its credit market could have far-reaching consequences. Many of the country’s largest corporations turn to the vastly more liquid euro or dollar markets when issuing debt, with names like Hennes & Mauritz AB and Ericsson AB shunning the krona market altogether.
To be sure, since last year’s meltdown Sweden’s corporate bond market has bounced back thanks in large part to central bank purchases that form part of a pandemic relief program. Most of the issuance has come from a debt-fueled real estate sector, whose bonds now make up more than half the total market. That lopsidedness has prompted some investors to adjust their portfolios to reduce exposure to the bonds.
The decision to publish daily trading data was put forward by the Swedish Securities Markets Association. It’s due to take effect no later than July 1, and will be delivered by affiliates of Nordic Trustee.
Persson says such “transparency projects” don’t get to the root of the problem.
“If you work in such a market, you must adapt your asset management to reality and not base your business model on the belief that it is possible to sell bonds on a large scale in a stressed market,” he said.
Jonas Osterlund, head of credit sales at SEB AB in Stockholm, agrees. The effort at transparency “will not improve liquidity,” he said in an interview.
He points to Norway, where Nordic Trustee has been publishing pricing data since 2013, without the extra transparency leading to a more liquid market.
“The main problem [in Sweden] is that the underlying asset is illiquid but the funds offer daily trading,” he said.
Sweden’s financial watchdog has in the meantime acknowledged that more measures might be needed to get the country’s credit market to function better. Next month, the Financial Supervisory Authority is due to present two reports, one on liquidity tools for funds and one on liquidity management in funds, according to Victoria Ericsson, a spokeswoman for the FSA.
More stories like this are available on bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2021 Bloomberg L.P.