Junk Bond Boom in Sweden Raises Concerns Over QE ‘Gasoline’

(Bloomberg) -- One year after Sweden’s corporate bond market suffered its worst crisis ever, buyers and sellers have roared back to life, with the riskiest debt now enjoying a boom fed in part by central bank cash.

“Not only are there more issues, but the book sizes are significantly larger,” said Ivan Adzaip, a debt syndicate banker at Swedbank AB in Stockholm. “If this continues at this pace, we should expect 2021 to be a record year, at least on the high-yield side.”

Adzaip says only two issuers turned to Sweden’s junk bond market in January last year. By March, investors started to bolt as a pandemic-driven panic ultimately led more than 30 Swedish fixed-income funds to temporarily shut their doors on redemptions, in a frantic effort to hold on to liquidity.

But then the Riksbank stepped in. In a history-making move, Sweden’s central bank announced it would add corporate debt to its quantitative easing program, dramatically changing the dynamics in the market. So far this year, Sweden has already seen 10 high-yield issuers sell notes.

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The market value of global high-yield bonds rose to a record of more than $3.1 trillion on Tuesday, even as valuations for investment-grade peers have fallen slightly from recent highs, Bloomberg Barclays indexes show.

“Trading and printing is at full speed,” said Andreas Halldahl, head of Swedish rates at Storebrand Asset Management in Stockholm. “And the Riksbank is pouring gasoline on the fire.”

About 30 billion kronor ($3.6 billion) worth of non-financial corporate bonds have been sold on the domestic currency’s primary market this year, according to data compiled by Bloomberg. That compares to 15 billion kronor for the same period of 2020, before the outbreak of the pandemic across Europe put a lid on issuance.

The Riksbank has so far bought 4.4 billion kronor of high-grade corporate bonds in an effort to limit the economic damage of the Covid crisis on the Nordic region’s biggest economy. But given the market’s swift recovery in the latter part of 2020, there are now questions around the central bank’s role and the risks it may fan if it keeps buying.

“Given all the money in the system now and all the commitments from the ECB and Riksbank we should expect spreads to go tighter and investors know that,” Adzaip said. “The fear is to stay on the side line and see spreads go tighter.”

Karin Haraldsson, a portfolio manager at Lannebo Fonder AB, says there was still “a lot of money on the sidelines ahead of year-end as investors wanted to keep some ammunition dry in case the market deteriorated.” But even those investors have now started buying.

Issuers have also been quick to latch on to investor demand for sustainable debt, according to Swedbank’s Adzaip. “We see more green bonds being issued and we also see that the appetite among investors for the green format is increasing,” he said.

Lannebo’s Haraldsson notes that there “are plenty of new issues within high yield, and many are jumping the ESG bandwagon.”

So a year on from the crisis, “the tides have changed,” she said.

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