Nordic High Yield: Roller coaster 2020 leaves a constructive outlook for 2021
2020 was a year for the history books in many respects. The Nordic High Yield market was no exception with credit spreads and returns showing the largest intra-year swings in the history of the market. The massive sell-off that we saw in all risk markets in March was exacerbated by some special factors in the Nordic credit markets.
In Norway the massive weakening and extreme volatility of the NOK (NOK weakened by more than 20% against EUR in a couple of weeks) led to large needs for generating cash as collateral in currency hedging contracts. The effect was an overshoot in credit spreads relative to other markets in this period. In Sweden there were massive outflows from credit funds resulting in 35 Swedish credit funds closing for redemption from the middle of March.
Credit spread (bp) development in international and Nordic high yield markets:
As the credit markets in the Nordic countries teetered on the edge the central banks came up with targeted solutions for the respective problems in market functioning. In Sweden, the chosen solution was the same as in the US and Europe, including credit in the already existing QE programs. This decision was taken by the Swedish central bank in June and they now have in place a relatively small program of 10 bn. SEK for buying credit bonds with the stated aim of establishing a presence in the credit market so that the program can swiftly be ramped up if the need arises. In Norway, which has no established QE program, the solution was that the central bank, for the first time since 1998, intervened in the FX market. The intervention was quite small and had the stated aim of reducing excess volatility. It was successful in that it restored market confidence and ended the vicious NOK weakening – credit spread widening cycle.
In our view the experience of March 2020 and, more importantly, the Nordic central banks’ experience of this period taught some lessons that will be remembered. Thus, we think that the risk of a similar (close to) total meltdown in the future has been reduced as the instruments employed by the central banks in March 2020 are now sharpened and ready in the (hopefully unlikely) event that a similar situation should arise.
Turning to the latter half of 2020 we saw a continued spread tightening in the Nordic high yield market just as in high yield markets elsewhere but to a somewhat smaller extent. Particularly in Q4 the spread tightening in the Nordic market was not able to keep up with developments in high yield markets in the Eurozone and the US. Parts of the reasons for this development might be that mutual fund flows in the Nordic high yield market was not particularly strong in 2020. It was by no means catastrophic but total inflows were barely positive for the year.
