ING IM sees Swedish government bond market as world’s safest
ING Investment Management believes that from the perspective of default risk the Swedish government bond market is the safest in the world, and that its safehaven status will remain in place for the foreseeable future.
According to ING IM analysis of market data, in each but one of the last 10 years, Sweden ranked first on sovereign credit risk factors such as solvency risk, external dependency, ESG and willingness to service debt.
Thede Ruest, fund manager, ING IM said: “The top three spots have consistently been taken by the Nordics – Sweden, Denmark and Finland – making it the bond market’s credit safest region in the world in the last decade. Sweden’s debt-to-Gross domestic product (GDP) ratio stands below 40% and is one of the lowest in the world. The country is amongst the few high-income countries that in its recent past have been able to generate government surpluses”
“Sweden’s external dependency is very low due to its large and sustained current account surpluses – most recently at around 7% of total GDP. Sweden, unlike members of the European Monetary Zone, has its own country specific policy framework (fiscal, monetary and macro prudential) and its ‘own’ currency – the Swedish krona – that allows for substantial flexibility to control funding costs.”
Ruest adds: “It is important to assess the willingness to service sovereign debt. We believe the best measure for this is to assess how flexible, transparent and consistent the government of a country handles challenges in the fields of the environment, its social fabric and the overall design of its institutional infrastructure.”
ING IM notes that while the safest government bond market in the world, Sweden is not entirely risk free. Household debt increased from 40% to 140% of GDP between 2000 to 2010. This leverage is a risk to the financial sector “and ultimately to public finances”. Should house prices fall, asset values decline and unemployment rise, then it would become more difficult to service debt.
ING IM runs what it calls a “Safe Treasury Bucket”, which apart from Sweden includes Denmark, Finland, Germany, New Zealand, Australia, the UK, Netherlands, Canada and Austria.
Sweden is set apart from its fellow Nordic neighbours because it offers liquidity they do not. This is why ING IM only looks at the Swedish rates market for tactical reasons, but for longer term strategic reasons the others are still worth buying and holding.
The Swedish central bank’s December interest rate cut suggested it has concerns over export demand and GDP growth. However, Ruest said that the action hasw eased pressure for further rate cuts and provided more certainty for the market. Sweden’s dependency on developments in the eurozone mean that should economic growth there improve, then the 10-year Swedish rate should rise from current levels.
Ruest said: “Our positive economic growth forecast for Europe is mainly due to a more constructive stance towards future euro sovereign crisis developments. Nonetheless, we believe that we are and will stay for a considerable amount of time in a general low economic growth environment. In this environment it is difficult to see Swedish 10-year rates rise to anything meaningfully above 2.25% in the near to medium term. Our base case is that the Swedish curve will continue to steepen as the Riksbank will provide further monetary stimulus. Monetary policy will result in downward pressure on yield levels in the Swedish front end, but the Swedish government bond market will remain the default safest in the world for the foreseeable future.”