MNI INTERVIEW: Market Absorbing Swedish QT Bonds - Riksgalden

Foreign investors have helped absorb Swedish government bonds sold back into the market under the Riksbank’s quantitative tightening programme, a top official at the country’s debt office told MNI, adding that he expected an increase in government borrowing will also be well received despite an initial adverse reaction.

"We've seen that when the Riksbank decreased their holdings, foreigners have increased their holdings, and also it's been spread quite deeply among the other sectors here in Sweden, that is funds, pension funds, banks," Klas Granlund, head of debt management at the Riksgalden, said in an interview.

The Riksbank has been at the forefront of central banks in disposing of debt holdings built up through quantitative easing, helping to restore liquidity to a relatively small market. Liquidity surveys and indicators have trended upwards since 2023, though recent months have seen a small decline.

"That might have to do with the geopolitical situation. So, liquidity is better, it's not fantastic, but it has improved since a few years back," Granlund said.

Demand for fresh issuance has help up well during 2026, he said, with healthy bid-to-cover ratios despite increasing auction sizes. Granlund played down an adverse market reaction to last Thursday’s news of a jump in borrowing plans. (See MNI INTERVIEW: Higher Bar To Future Riksbank QE - Thedeen)

"Short-term volatility is not something we take into consideration; of course, it can affect the investors and their ability to buy our bonds, which is negative, of course, but I'm not that concerned.”

While Granlund noted that investors had expected the Riksgalden's latest report would leave the deficit numbers unchanged, the figure for this year was revised to SEK196 billion from SEK173 billion in November, and the 2027 projection rose to SEK208 billion from SEK194 billion.

Swedish bonds sold off against bunds on the news, with the favourable yield spread on the 10-year compressing to 17.5 basis points from 26.5 bps prior to the announcement, although Granlund described the initial move as a "small reaction."

"Swap spread wise, we've been fairly stable up until [Thursday’s report]," he had said on Friday morning.

WEEKLY AUCTIONS

The Riksgalden also announced that it was moving to weekly auctions, and Granlund said that this schedule would be met even if demand faltered.

"We would not skip an auction just because of volatility," he said, adding that "we've published exactly which [products] are going to be issued until the next report in November."

"If there is not enough competitive bids in an auction we can cut the volume," he said, adding that the Riksgalden would then instead wait until the next funding plan to reallocate

The Riksgalden's maturity target is set by the government. Recently its issuance has been concentrated in the 10-year sector, with some in the five- and two-year segments, and very small amounts in the ultra longs. While a small issuance of a 2071 bond was enthusiastically received, Granlund said he was cautious of issuing too much ultra-long paper without fresh structural demand, for fear of cannibalising shorter maturities such as the 10-year. 

“It was a very strong demand for that small amount. We get questions if we can issue more," he noted.

HEDGE FUNDS

While the Bank for International Settlements among others has highlighted the risk of correlated hedge fund activity fuelling volatility in sovereign debt trading, Granlund said this should not be a problem so long as funding markets remain open. (See MNI INTERVIEW: Must Tackle Hedge Fund Debt Risk - BIS's Gelos)

"Regarding hedge funds, I think the larger risk is probably their funding situation of their holdings. If the repo market continues to function, that will be more decisive if they can maintain their positions, rather than they just decide to diversify away completely from Sweden in general,” he said.

While hedge funds can all shift trades very quickly "we are very long term, we are issuing bonds now [nearly] every week, and short-term volatility is not something we take into consideration. Of course, it can affect the investors and their ability to buy our bonds, which is negative ... but I'm not that concerned," he said, noting that a significant share of the Swedish covered bond market is owned by hedge funds.