Swedish debt office says debt market under growing strain from QE

STOCKHOLM: Liquidity in Sweden's government debt market is increasingly strained as a result of the central bank's bond purchase programme, the head of the Swedish Debt Office said on Tuesday.

The Riksbank has bought around 300 billion crowns ($37 billion) of bonds in the last three years and now owns nearly half the outstanding stock of government paper.

Strong government finances and changes in capital regulations have also negatively affected liquidity.

"The Riksbank has bought about 46 percent of the outstanding stock of bonds. This contributes to deteriorating liquidity in the market," Debt Office Director General Hans Lindblad said during a parliamentary hearing on financial stability.

Lindblad said a larger than expected budget surplus last year could force the Debt Office to further cut already meagre borrowing plans.

"Clearly, when you can see that much more money than expected is rolling in, there is naturally a risk that we will have to revise our borrowing forecast downward," Lindblad told reporters.

The government ran a 61.8 billion crown budget surplus in 2017, much higher than the Debt Office's October forecast of 28.3 billion crowns.

Government debt levels -- at around 31 percent of GDP -- are already at their lowest level since the late 1970s, according to Finance Minister Magdalena Andersson.

Lindblad's warning reflects increasing signs of strain in the bond market.

Average daily volumes in the Debt Office's repo facility have soared to roughly 60 billion crowns from just above zero early in 2015 when the central bank started buying bonds.

In the latest central bank minutes, Deputy Governor Cecilia Skingsley pointed to problems for investors in making large transactions.

"Tendencies towards the divergence of indicative prices and actual final prices are another sign that the functioning of the market has deteriorated," she said in the minutes.

"Being an investor but being unable to adjust holdings effectively is a deterrent towards future market presence."

Foreign ownership of Swedish debt has declined sharply over the last three years, Statistics Office data shows.

At its last meeting in December, the central bank said it would end net new bond purchases, but brought forward reinvestments of bonds maturing further ahead, something that will boost its balance sheet significantly during 2018.