LONDON: An economy in recession rocked by anti-austerity protests, hefty debt issuance and worries about its top credit rating - the year is not shaping up well for Finland's bond market.
Finnish bonds, which produced some of the poorest returns in the euro zone in 2015, are showing signs of falling further behind other triple-A rated peers, despite some support from European Central Bank debt purchases under its quantitative easing programme.
As Finnish bond prices have fallen, the gap between the 10-year yield and that of European benchmark Germany has grown to around 30 basis points.
That's around its widest in eight months and compares with a spread close to zero in March last year.
Even finance minister Alexander Stubb has declared Finland the "sick man of Europe", and its debt has performed poorly against other smaller euro zone economies that also have triple-A ratings from at least one of the big three credit agencies.
Finnish 10-year yields, at 0.83 percent, overtook Dutch counterparts late last year after trading near or below them for much of 2015, and are also close to Austrian yields.
The 10-year yield spread between Finland and the Netherlands is near its widest level in four years.
Nordea Bank expects Finnish yields to converge with French 10-year yields, which are trading at 0.91 percent, given concerns about Finland's economy and high debt issuance that is likely to be made largely in early 2016.
While most other euro zone states are paring back bond issuance in 2016 as they reduce their budget deficits, Nordea estimates Finland will sell 13 billion euros ($14 billion), a jump of more than 40 percent from 2015 and a sizable amount compared with its current outstanding debt of 113 billion euros. "Investors have been sitting on Finnish bonds through a lot of bad news and now their sensitivity is increasing, judging from how many questions are being asked about the Finnish outlook compared with some years back," said Nordea's chief strategist Jan von Gerich.
FOUR-YEAR RECESSION
Finland probably suffered its fourth straight year of economic contraction in 2015, according to the central bank , and the unemployment rate is close to double digits.
The economy has yet to return to 2008 levels of output due to setbacks including the decline of flagship company Nokia's phone business and the effects of international sanctions and recession in neighbouring Russia, one of its biggest export markets.
Huge protests and strikes from trade unions over legislation to boost Finland's competitiveness pose more problems for the economy.
They could also contribute to more credit downgrades after S&P cut Finland's top credit rating in 2014, undermining investor sentiment further.
"To some extent the poor performance of Finnish bonds reflects the negative ratings outlook," said Marius Daheim, senior fixed income strategist at SEB AG.
All three major ratings agencies have Finland on a negative outlook. Moody's and Fitch Ratings affirmed its triple-A rating in the second half of last year, while S&P maintained its AA rating for the government in September.
Moody's is the first to assess Finland in 2016 on Feb. 5.
Analysts said a wild card for the bond market is a domestic debate about Finland's euro zone membership, with some already talking about a possible Finnish exit or "Fixit".
A petition for Finland to leave the bloc has gathered more than 50,000 signatures, the number that forces parliament to discuss its proposal for a possible referendum.
The debate is expected to take place in the first half of 2016. SEB's Daheim said the discussion could be important in the context of Finland's economic malaise, which has led to a view among some Finns that a return to the markka currency would help to boost growth prospects.
"The chances of success of the current Fixit-referendum, however, are still uncertain from today's perspective," DZ Bank said. "Nevertheless, if further flashpoints in the Monetary Union are set off or for example Great Britain decides in favour of Brexit, a swing in sentiment could continue to heat up." Britain, which opted out of the euro, is due to hold a referendum on its membership of the European Union by the end of 2017, with speculation growing that Britons could vote as soon as the middle of this year.
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