A 50-year bond from Sweden is about to test inflation anxiety

(BLOOMBERG) – Sweden is about to test investor appetite for its longest ever bond, in a sale that promises to reveal just how anxious investors are about the threat of inflation and higher interest rates.

“We’re now starting to investigate demand and gather the banks that will lead the offer,” Anna Sjulander, head of debt management at the Swedish National Debt Office, said by phone.

Sweden wants investors to commit money for half a century at historically low rates at a point in time when anxiety about the outlook for inflation has started to trigger regular bouts of market panic. That’s as record government stimulus packages across the globe feed speculation that the interest-rate environment of the past decade could soon be upended.

Until now, the longest bond ever issued by Sweden’s government had a maturity of 30 years. That was successfully launched at the height of the global financial crisis in 2009. For its 50-year bond, for which plans were first unveiled last week, Sweden is intending to issue 10 billion kronor (US$1.2 billion). The syndication is planned for this month.

Sjulander says that longer-dated bonds tend to draw mostly foreign investors, citing a survey commissioned by the debt office and based on responses in the two final months of 2020. But since then, a lot has changed.

Alexander Onica, an asset manager at Skandia Investment Management, says a 50-year bond in the current environment may prove a hard sell. That’s in part because Swedish pension funds don’t need to go to the same lengths now to cover their obligations as they did when Sweden issued its 30-year bond, when falling rates swelled the net present value of liabilities.

“The situation has changed since then,” said Onica. He thinks domestic investors will have little interest in “locking up money for half a century,” at a rate of around 1.5 per cent.

Timing is everything

Just a few months ago, sovereign issuers were offloading ultra-long bonds at very favourable rates. Greece attracted bumper demand in March in its first sale of 30-year bonds since 2008, completing the country’s full return to debt markets. Italy issued its first new 50-year bond in almost five years in April, and countries including Austria and France sold notes with the same time to maturity in that month.

But by late April investors warned that the window for Europe to sell its longest dated debt could be closing amid a double whammy of heavy supply and fears of a reflationary resurgence.

Ella Hoxha, a senior investment manager at Pictet Asset Management Ltd. in London, says that “Sweden’s debt office is a bit late to the party.” Though it “may still make sense from the debt office’s perspective” to move ahead with a 50-year bond, Hoxha said she’s “not personally looking to participate in this issue, because I think there is a short-term risk for more steepness in the curve after the macro data has been very strong.” That said, investors undeterred by a lack of liquidity might be drawn to the fact that Swedish debt is “very high quality and has a very high scoring on ESG metrics,” she said.

More on this topic

Nic Hoogewijs, a senior fixed-income portfolio manager at Lombard Odier Investment Managers, said he likes Swedish government bonds because of the country’s “relatively strong macro-economic profile” and “its favourable extra-financial position.” It also plays well in an ESG portfolio, he said.

“However, in the current low-yielding environment, a number of sovereign issuers are extending their respective maturity profiles,” Hoogewijs said.

“We expect that European interest rates will drift higher in the coming months as Covid restrictions are lifted and economic activity rebounds,” he said. “In this environment, we take a cautious stance on long-dated duration exposure.”

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