Swedish debt weathers extra borrowing for central bank

STOCKHOLM: Sweden's borrowing costs have not been pushed higher by additional borrowing to provide a $15 billion backstop for the banking sector and core funding plans remain on track, the country's debt management chief said.

Thomas Olofsson, who heads the Swedish debt office's department for debt management, told Reuters that an expected economic downturn had been built into financing plans and that borrowing this year was unlikely to be significantly more than forecast last autumn.

"The increase in supply (for the central bank) has neither affected demand nor pricing (for Swedish debt)," Olofsson said in a telephone interview conducted on Monday.

The debt office said last week it would lend the central bank 100 billion crowns ($15 billion) to boost foreign currency reserves, but had agreed to do so reluctantly a rare public acknowledgement of disagreement between financial authorities.

The central bank said last year it wanted to boost reserves in case it needed the funds to manage a banking crisis.

Excluding funding earmarked for the central bank, Olofsson stuck to the forecast of 55 billion crowns of new borrowing this year, well above the 28 billion crowns issued in 2012.

Government borrowing guidelines also direct the debt office to raise the stock of bonds with maturities longer than 12 years to 70 billion crowns from a current 53 billion crowns.

Olofsson said there was no rush to reach that target, however, and that investor interest in longer-dated paper was not especially strong. When the time came to issue such paper, the natural thing would be to test the market in its regular auctions, he added.

The Debt Office has also said it might issue a new 30-year bond and could reach the target of having more longer-dated paper faster if it issued more of the new 30-year debt than it buys back, he said.

FOREIGN INTEREST

Olofsson said foreign interest in bonds issued by Sweden, one of the few European countries with a full set of three triple-A credit ratings, had dipped as stresses in the euro zone had eased.

Sweden's own economy is forecast to have contracted slightly at the end of last year, although that dip is expected to be reversed in the first quarter of 2013.

Olofsson said demand for Swedish debt remained robust despite a recent rise in borrowing costs that outpaced a similar increase for Germany, Europe's low-risk benchmark.

The share of the country's debt bought by foreign investors rose to about 50 percent in 2011-2012, although it had always been relatively high, at 35 percent or so.

"The situation has now calmed down a bit in the euro area and so it is possible that this (proportion) is stabilising or going down a bit," he said. "Even if the share goes down slightly, there is still strong interest."

The yield on Sweden's benchmark 10-year bond has risen 26 percent since October 2012 while the yield on benchmark German debt has increased 12 percent.

While the Swedish yield was 6 basis points higher than the German equivalent then, the spread has now risen to 27 points. Borrowing costs for both countries nevertheless remain close to historic lows.

Olofsson said the debt office had always been cautious in forecasting, so that a forecast downturn in the economy in the fourth quarter of 2012 after robust growth in the first nine months would not affect the outlook for issuance.

"We have no expectation in the current situation that we will need to increase our borrowing significantly (compared with a forecast made in October)," he said.