EXCLUSIVE: Sweden NDO Head of Funding: Reduced Issuance to Hamper Liquidity

19 November, 2021

By David Barwick – Frankfurt (Econostream) – The Swedish National Debt Office accepts that with the government expecting a budget surplus in each of the next two years, its reduced debt issuance will contribute to less liquidity, according to Johan Bergström, Head of Funding at the NDO.

In an interview with Econostream on Thursday, Bergström pointed out that the supply from the NDO depends on central government borrowing needs, so that surpluses being forecast now for 2022 and 2023 inevitably meant reduced issuance volumes.

‘Unlike some other national debt management offices, we are not allowed to build up buffers and borrow more than needed to cover budget deficits and redemptions’, he said. ‘A consequence of our reduction in supply coupled with the Riksbank’s QE is that the free float in the secondary market decreases, hampering liquidity.’

‘We cannot directly act to affect liquidity in the secondary market but we can do so indirectly via our market-supporting repo facilities’, he continued. ‘A well-functioning, liquid secondary market is an important part of minimizing the cost of the central government debt over time – which is our overall objective.’

Notwithstanding fundamental optimism about Sweden’s borrowing outlook, Bergström agreed that there were ‘some downside risks regarding our macroeconomic forecast, mainly the development of the pandemic of course but also inflation and its consequences as well as some risks linked to supply problems.’ In the latter context he noted shortages and questions about Cementa, a mining business on which avoidance of an acute cement shortage in Sweden depends.

‘There is also some uncertainty in the forecast for the central government budget balance’, he continued. ‘One such uncertainty regards the use of tax accounts for deposits. We assess that about SEK 70 billion sitting in tax accounts are deposits/capital placements that may be withdrawn if short-term interest rates rise, making the tax account (with 0 % interest) less attractive for placing funds.’

‘Like most other forecasters, we have been surprised by the strength of the economic recovery in Sweden after the pandemic and the effects of it on central government finances’, he said.

The NDO would maintain its short-term funding, in particular the stock of T-bills and liquidity management instrument, on a ‘relatively high level’ compared with before the pandemic, he said. That would ‘provide flexibility for managing unexpected fluctuations in the net borrowing requirement, bond redemptions and any rapidly changing conditions.’

Bergström expressed satisfaction with the success of recent NDO issuance, noting ‘strong demand all through the pandemic and still’, decent bid-to-cover ratios as well as strong bid volumes and interest from a diversity of investors in NDO syndications.

‘Regarding the development of our investor base, we have seen the share of international investors decreasing during the period in which the Riksbank increased its holdings of our bonds’, he said. ‘At the same time, issuing a green bond in 2020 contributed to reaching some new investors.’

In terms of green issuance, though not foreseen in the funding plan published three weeks ago, Sweden’s government has since affirmed in its 2022 debt management guidelines the intention of adopting a list of green expenditures early next year, Bergström observed, thus giving the NDO ‘the possibility of issuing additional green bonds.’

‘We need to analyse any future green bonds within the context of the overall debt management and funding plan’, he said. ‘We will communicate any changes to our funding plan when we publish our next borrowing report in February.’

Bergström denied that European Union issuance to fund the NGEU constituted serious competition for the NDO. ‘As an issuer in our own currency and of the highest credit rating we see limited competition from NGEU’, he said.