(c) 2013, Bloomberg News.
(c) 2013, Bloomberg News.
COPENHAGEN, Denmark — Danske Bank is giving up its long position on 10-year bonds sold by Norway and Sweden, relative to German debt, after a recovery in the euro area wiped out Scandinavia's haven appeal.
Swedish bonds with maturities 10 years or longer delivered investors an 8.9 percent loss this year, including reinvested interest, according to Bloomberg/EFFAS indexes. Similar-maturity bonds sold by the government of Norway returned 0.3 percent, far less than investors made on the debt of Spain, Greece and Portugal.
As the euro zone exits its longest recession on record, the need to guard against a default in the single currency area is evaporating. Investors have responded by turning their backs on low-yielding debt sold by Scandinavia's stable AAA rated governments and instead bought up bonds from nations once at the center of Europe's debt crisis.
Scandinavian bonds "have underperformed after things normalized in the euro zone, so we're calling this trade as they haven't performed," Danske Bank senior fixed-income analyst Anders Moeller Lumholtz, said by phone. "We're not recommending selling these bonds and we're not shorting against bunds; we just had a recommendation that underperformed after assets in the euro area were re-priced and we have to take that into account."
The yield on Sweden's benchmark 10-year bond traded at 2.45 percent at the end of last week, compared with an April low of 1.56 percent. Ten-year Norwegian yields reached 3 percent on Aug. 30, compared with a May low of 2 percent. Yields on similar-maturity Spanish debt have eased over the same period, trading at 4.54 percent on Friday versus a June high of 5.12 percent.
Swedish 10-year yields jumped six basis points to 2.51 percent as of 1:10 p.m. local time, while yields on similar- maturity Norwegian debt rose six basis points to 3.08 percent.
Against that backdrop, Sweden and Norway are increasing debt issuance. Sweden is due to tap 3.5 billion kronor ($530 million) of its November 2023 bonds, while Norway will sell 4 billion kroner ($659 million) in bonds due May 21.
Investors have had to reposition after economic growth trajectories from Asia to the U.S. to Europe changed course. Asian markets, once coveted for their high-growth, high-yield performance, have tumbled since signals from the U.S. that monetary stimulus in the world's largest economy may be scaled back.
In Europe, Germany and France have dragged the 17-nation currency union out of six quarters of recession as manufacturing recovers. Meanwhile, Scandinavia has been pummeled by a currency sell-off as investors turned to more liquid markets.
Sweden's krona is down about 2 percent against the euro since the start of the year, while Norway's krone has slumped about 8 percent in the period. Currency losses, aside from eating into returns, mean the central bank of Norway is unlikely to cut rates, Danske Bank said.
According to DNB ASA, Norway will be the only European nation of the 15 it tracks whose economic growth won't accelerate next year. The biggest drag comes from consumers, who have hesitated to spend as house price gains peter out and private debt mounts.
In Sweden, Scandinavia's biggest economy, Finance Minister Anders Borg on Aug. 23 cut this year's growth forecast to 1.2 percent from 1.3 percent previously as he stepped up stimulus plans. The economy will rebound in 2014 and grow 2.5 percent, Borg said.
"The weak performance in these Norwegian and Swedish bonds won't blow over as the Norwegians may be issuing more bonds than the market can swallow and the chance the Swedish Riksbank may cut rates is subsiding as the economy improves," Lumholtz said. "These countries are still safe, while the market is telling us investors don't have the same appetite for safe assets as they used to."