Sweden Heavily Redacts BlackRock Report on Credit Market Woes

(Bloomberg) -- Earlier this year, Sweden’s credit market cheered as the world’s oldest central bank brought in consultants from BlackRock to help it move ahead with a controversial corporate bond purchase program.

Now, the cheering has turned to disbelief as it becomes clear Sweden’s Riksbank won’t share any of the findings BlackRock made with the very market the program is intended to help.

In response to a request by Bloomberg News for details of BlackRock’s research, the Riksbank sent a heavily redacted document consisting of 19 pages. “The Swedish corporate bond market exhibits a number of singularities when compared to other Anglo-Saxon markets,” the document showed. Almost everything else was blacked out.

The central bank, which is due to announce its next policy decision on Tuesday, said a further 68 pages of the report couldn’t be shared at all, as they, “in their whole, are covered by secrecy.” It cited confidentiality clauses in chapter 16 of the Public Access to Information and Secrecy Act.

As it dawns on the market that it won’t be getting the research it had expected from BlackRock’s Financial Markets Advisory unit, the disappointment is palpable.

“It becomes a black box, run by the Riksbank, with highly unclear working methods and motives,” said Andreas Halldahl, head of Swedish rates at Storebrand Asset Management. “It only brings more uncertainty and destroys another market that worked just fine without them.”

Sean George, chief investment officer at Strukturinvest AB in Stockholm, said, “I find it regrettable that the Riksbank has not released more of the BlackRock review. We believe that the Swedish credit market is still structurally dangerous, which was clearly self evident in March. In our view, that document could possibly force a much needed self regulation in the systemically important Swedish credit markets.”

The Riksbank’s decision to start buying corporate bonds this month is turning into one of its most controversial policy moves ever. The legal adviser to a parliamentary committee responsible for drafting a new Riksbank Act has suggested the program might be unlawful. And investors have warned that the purchases will distort bond prices in a market that’s already rebounded from the Covid crisis.

The corporate bond program even raises questions about the Riksbank’s mandate when it comes to unconventional monetary policy, according to Par Osterholm, a professor of economics at Orebro University.

“A relevant question to ask here is how much credit risk it’s reasonable for the Riksbank to expose itself to,” Osterholm said in an opinion piece in Svenska Dagbladet. The professor also expressed concern over the buildup of financial bubbles. “It’s surprising that this issue isn’t mentioned as a risk at all by the Riksbank Executive Board in the most recent minutes.”

Still Vulnerable

The Riksbank has argued that its program is a natural extension of existing quantitative easing measures needed to support the largest Nordic economy. It’s also highlighted the uncertainty surrounding the economic climate, amid signs of a second wave of the pandemic.

“The Swedish market for corporate bonds is currently functioning in a satisfactory manner, but is assessed to still be vulnerable if the crisis worsens and unease increases,” the bank said earlier this month. “The purchases of corporate bonds, together with the purchases of commercial paper that are already in progress, will keep companies’ funding costs down and reinforce the Riksbank’s capacity to act if the credit supply to companies were to deteriorate.”

But according to Halldahl, the Riksbank’s corporate bond program has left more questions than answers.

“They set out to ‘save’ a market, but can’t really define what the problem is and how they will make it better,” he said. “Nor can they say what distinguishes the Swedish market from the foreign ones and in which areas we function so much worse.”

Usual Suspects

The Riksbank started its corporate bond-buying program on Sept. 14, but hasn’t provided any details of actual purchases.

The top 10 performing Swedish corporate bonds last week, based on the Riksbank’s criteria for purchases, were notes issued by Sandvik AB, Swedish Match AB, Svenska Cellulosa AB, Volvo Treasury AB and Vattenfall AB.

The data compiled by Bloomberg compares current Z-spread values with their closing level on Sept. 11. To access the database click here.

©2020 Bloomberg L.P.