Exclusive: Transcript of Interview with Swedish NDO Head of Funding Johan Bergström

11 June 2024

By Aurėja Bobelytė – VILNIUS (Econostream) - Following is the full transcript of the interview conducted by Econostream on 30 May 2024 with Johan Bergström, Head of Funding of the Swedish National Debt Office:

Q: Mr Bergström, the NDO recently issued a green credit guarantee for a loan to Preem, with plans to offer these guarantees until the end of 2024. Are there any discussions about extending this programme beyond 2024? If not, what other tools might the NDO consider to promote green investments? What are the NDO’s strategic plans for future green issuance?

A: The green credit guarantee was done under instruction by the government and that programme runs until the end of 2024. At this stage, the NDO does not know if it will be extended going further or not. That is up to the government to decide.

Regarding our green issuance, we issued a green bond in 2020 by the instruction of the government. After that, we haven't had any real green expenditure dedicated to back further green issuance. Though, would we get green expenditures, we would have to take into account the composition of the debt portfolio. There has been some time where the liquidity for the nominal bonds and inflation-linked bonds has not been the best. So, once we get the liquidity back to a state where investors and our primary dealers think we don't need to focus all available funding to those specific markets, at that stage we could think about what other instrument classes should be targeted, but so far, we promote the nominal bonds and inflation-linked bonds. Those are the main and most important funding sources for us.

Q: Do you have a particular target timewise?

A: No, but of course, the earlier for us and for the department, the better. But I'm coming from the debt management part within the debt office and the credit is a different department. But of course, we would like to get instructions by the Parliament as soon as possible to know how to plan for the future.

Q: You have an aim that inflation-linked krona debt would make up 20% of Swedish central government debt. What are the main considerations and challenges in maintaining this specific composition, and how does it influence overall debt management strategy?

A: The Swedish NDO introduced inflation-linked bonds in the mid-1990s, and it's been a very valuable source of funding for us and for diversification of investors. Now, one challenge going forward is that since the 1990s the debt has not really moved in Krona terms but in relation to GDP, we are down to below than 20%. What we have seen during the last few years was falling debt and at the same time higher inflation. So of course, that composition has made that the share has increased by almost 25%. However, we don't have a redemption in nominal bonds or inflation-linked bonds for this year. But then, for the coming years (2025-2028) we have redemptions for the inflation-linked bonds, and thereby we should get back to our target of around 20%.

Q: For the first time in a while Sweden is facing a budget deficit that is also forecasted to remain in 2025 as well. Is that a large obstacle for you?

A: We are always prepared to adjust our funding plans, both up and down. What we are doing at the moment is that we are increasing both the long-term funding as well as the short-term. In the February report we increased both areas with decent size, now in the May report we stick with the increased funding volumes for nominal bonds and we’re cutting back somewhat on T-bills.

Q: Are you satisfied with the demand for Swedish government bonds?

A: We are very pleased with the demand. Our investors through our primary dealers turned up at every auction and we are very pleased with the outcome. But of course, we have a strong financial framework, triple A rating and debt to GDP ratio below 20%.

Q: Where do you see the average maturity of your portfolio heading? Do you have a particular goal going forward for the average maturity?

A: The guideline from the government is 3.5-6 years for duration. And if you go and look on the average time of maturity for the nominal bonds, they have been fairly stable at 5.5 years since 2010. Of course, after the pandemic, when we increased issuance of T-bills, the average maturity decreased somewhat but now we're back to our target for the nominal side. The tricky ones for us are, as you mentioned previously, the inflation-linked bonds, since we are above the target, it's hard to increase issuing more bonds because we're already over. So, with the help of redemptions in the coming years, we will get back to a slightly longer, average maturity for the inflation-linked bonds as well, but the overall target is three and a half to six years.

Q: Are you happy with the issuance of bonds via auctions? How would you evaluate the outcomes of the latest auction for nominal government bonds?

A: We normally conduct 20 nominal bond auctions per year. And we think that we limit the execution risk by being frequent in the market. We saw a very good turnout. The price, if you look on the bids, both that we receive and the bids that are allocated in the auctions, is in a very narrow range, so I think the price transparency of the market is good and I’m very pleased with outcome.

Q: Can you say something about further syndication plans this year?

A: There are no more syndication plans for this year. We did issue a $2 billion 2-year bond earlier this year, which was well received in the market. We have further foreign currency plans for the next year. For this year, the bond issuance was equivalent to 21 billion Swedish Krona, next year, it will be 22 billion. This increase is mainly due to the weaker Krona compared to the last forecast. Therefore, a bond of roughly the same size could be expected in foreign currency. We will choose the most cost-efficient and low-risk execution method, which could be either a euro or a dollar bond, depending on market conditions at the time of execution.

Q: The NDO aims to phase out foreign currency exposure by 2027. What challenges do you anticipate in achieving this goal, and how are you planning to address them?

A: Regarding the exposure in foreign currencies, we decrease it in very small steps so that we have no impact in the market.

Q: You recently sold $2bn 2-year bonds and it seemed to go quite well, with much getting placed into the Central Banking community. Does the success of this deal herald a more prolonged active period of foreign currency issuance in 2025 and beyond?

A: Of course, we'll see how the funding need evolves going forward. Last time we were in the market in a foreign currency was in October 2020. So, it was almost three and a half years ago and maybe that's a slightly long gap of not being active. But what we saw in the transaction from this year is that investors still like our name, and they still have credit lines for us. So that's very good. And we would like to be back in the market on a fairly regular basis. But of course, the funding in Swedish Krona is our main concern.

Q: How would more foreign currency issuance dovetail with the worsening of markets’ functioning over the past 10 years that was highlighted in the Mårten Bjellerup and Julia Rådahl paper from last year?

A: We are allowed to fund for the budget and redemptions. So, we cannot fund or issue bonds for anything else than that and of course, with the development of the liquidity in the market for Swedish government bonds, we have tried to focus all our funding sources into the domestic market to help it as good as we can. Going forward, once we think and investors am a primary dealers think there is a better functioning market, and we have funding needs to even entertain the international community we would like to be on a fairly regular basis in dollars or euros.
Q: Sweden has fairly limited net funding requirements. Let’s assume that the budget contains positive surprises, what adjustments would you make to funding plans i.e. reduce bills, linkers certain tenors?
A: Our strategies to changes firstly handed in the short-term maturities either T-bills or liquidity management we could do commercial paper or in foreign currencies. And of course, if the funding need changes swiftly, it's in the short part of the curve that we do the adjustments, so we can increase T-bills, or we can decrease T-bills. So that's where the adjustments will occur. And that was very clear in 2020 when we issued quite a lot of T-bills going into the pandemic but then afterwards when the economy bounced back much quicker than expected. It was an easy way to decrease the debt because the bills mature in a fairly narrow time horizon.

Q: And a question in the other direction, if the budget numbers turn out worse than expected, how might you respond?

A: I would say it's the same thing. We would in the short-term, increase T-bill issuance and then going further, we aim to turn over our funding needs to the nominal bond market and inflation-linked market but that's when we are more certain that the higher debt level is persistent over time.

Q: In what ways might Sweden’s acceptance to NATO influence the attractiveness and perceived risk of Swedish government debt among foreign investors?

A: We are still a triple A rated name with a strong financial framework. And so far, we have not seen any adjustments or perception of Sweden. Of course, within the budget, there is expenditure for defence, but it is already published in the plan that we presented yesterday. So, there ought not to be that many changes on the perception of Sweden due to that.

Q: Looking ahead, what would you consider to be the main challenges for Sweden's debt issuance programme?

A: We have a strong following from both domestic and international investors. Our goal is to maintain the attractiveness of our market for nominal and inflation-linked bonds. However, compared to many other European DMOs, our funding needs are fairly limited. This means we cannot offer the same level of liquidity as many other markets.

It is important to highlight to investors and our counterparts the attractiveness of our debt, particularly our low debt-to-GDP ratio and prudent financial framework. This ensures that our bonds remain a strong investment case, even though they are not as liquid as those offered by larger European debt issuers.