Riksbank Begins Its Most Controversial Leg of QE Program

Sweden’s central bank will today make good on its promise to enter the corporate bond market, as it begins buying 10 billion kronor ($1.1 billion) worth of securities.

But the move, which the Riksbanksays will rein in funding costs for businesses and help contain credit supply shocks, has courted controversy ever since it was announced in July.

Some investors have questionedthe timing of the purchases, which come six months after Sweden’s credit market was brought to its knees by Covid-induced panic selling. Since then, the market has largely recovered and a wide range of companies are raising debt ascredit spreads narrow.

“I do not think they need to start buying now,” said Cicero Fonder’s portfolio manager Carl Johan Lagercrantz, who added that it’s “positive” that the program is in place.

Another point of contention is the scale of the purchases. Some market participants say that $1.1 billion isn’t going to have a material effect in a domestic bond market estimated to be worth$45 billion.

Then there’s the issue of how it will impact transparency in the corporate bond market — something the country’sfinancial watchdog has said must be improved in the wake of the crisis. The bank’s QE plan “will incentivize rating shopping,” Danske Bank analystssaid earlier this month, as issuers turn to ratings companies that are more likely to give them favorable grades.

There’s also some concern the Riksbank’s purchases willdistort prices, after similar programs upended pricing in Sweden’s covered and government bond markets.

Eventhe legality of the program has been questioned. In May, the top expert advising the parliament committee that oversees the Riksbank said such purchases were off limits under existing law.

But the corporate QE program also has its backers, and many welcome the purchases as a mechanism for dealing with future shocks.

Lars Lonnquist, a portfolio manager at Spiltan Fonder, said, “The signal value of the Riksbank developing this tool is significant as it means that the next time the market shakes, the tool can be activated relatively quickly with amounts that far exceed the now decided framework.”

Still, the question of timing remains. Fredrik Tauson, a fund manager at Nordic Cross Asset Management, asks whether it wouldn’t have “been enough for the Riksbank to communicate that now it’s in place and ready to be used if we see future needs for it.”

Riksbank’s Corporate Bond Buying Plan:
  • 10 billion kronor between September 2020 and June 2021
  • Non-subordinated corporate bonds
  • Companies with credit ratings equivalent to Baa3/BBB- or higher
  • Bonds with remaining maturity of up to five years
  • Riksbank will apply a limit to its holdings of corporate bonds to no more than 50% of an individual company’s total outstanding volume of corporate bonds in Swedish krona, and no more than 50% of an individual bond issue
  • First purchases shall be made through “bilateral purchase procedure”
  • Purchases will be made on the secondary market from the Riksbank’s monetary policy counterparties:

    • Avanza Bank AB
    • BlueStep Bank AB
    • BNP Paribas S.A.
    • Citibank Europe plc.
    • Danske Bank A/S
    • DnB Bank ASA
    • Klarna Bank AB
    • Kommuninvest i Sverige AB
    • Landshypotek Bank AB
    • Länsförsäkringar Bank AB (publ)
    • Marginalen Bank Bank AB
    • Nordax Bank AB
    • Nordea Bank Abp
    • Nordnet Bank AB
    • Northern Trust Global Services SE
    • Santander Consumer Bank AS
    • SBAB Bank AB (publ)
    • Skandiabanken AB (publ)
    • Skandinaviska Enskilda Banken AB
    • Sparbanken Syd
    • Svenska Handelsbanken AB
    • Swedbank AB
    • Ålandsbanken Abp

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