Nordic Fixed Income Outlook
2020 will be a year we will all remember for a very long time and it will enter the history books based on the wide-ranging effects of the pandemic on global economic and political developments.
Long term effects of the pandemic are likely to be felt in a host of areas for many years to come, in the result of the US election, the massive increase in government debt around the world, the potential impact to world trade and global value chains and potentially the patterns in the way we, as individuals, work and travel, to name but a few.
Although the pandemic is still raging in many areas of the world, the recent developments on the vaccine front raises well-founded hopes that at least most of the industrialized world can return to something resembling (a new) normal during the course of 2021. This is the backdrop for these comments about the market outlook for Nordic fixed income for 2021. But first a look at the drama and developments of 2020 in the Nordic markets.
Nordic credit markets 2020
2020 was an unprecedented year in the Nordic fixed income markets. A combination of factors led to the largest spread widening we have ever seen in the Nordics. This is in contrast to global spread developments where swift action from the major central banks prevented credit spreads from reaching the levels we saw during the financial crisis in 2008 (and in Europe well below the levels during the government debt crisis in 2011).
US and European credit spreads:
In contrast credit spreads in the Norwegian and Swedish credit markets went to wider levels than we saw during the financial crisis, and in Sweden we also saw 35 individual credit funds having to close for redemptions.
Credit spreads of various maturities for Norwegian banks
The main reason that the initial impact from the pandemic to credit markets was larger in the Nordics, was that, whereas the major central banks (The Fed, ECB) had the necessary tools sharpened and ready (mainly in the form of QE that also included corporate bonds), and acted swiftly to mitigate the effects in the bond markets, this was not the case in Norway and Sweden. Sweden did have a QE program up and running but this program did not include corporate bonds. Massive outflows from Swedish credit bond funds thus led to the market collapsing. In June, well after spreads had normalized, the Swedish central bank announced that they would start buying corporate bonds from September 2020. The program is quite small, 10 bn. SEK, but as the central bank states in the description of the program it is instigated to establish a presence in the credit market to be able to swiftly increase the program if necessary. In this way the Swedish central bank seeks to mitigate what was shown to be a weakness in the Swedish credit market in March.
