Swedish Credit Funds Suffered Record Client Exodus in March

(Bloomberg) -- Investors in Sweden withdrew an unprecedented 23 billion kronor ($2.3 billion) from corporate bond funds last month amid a rush for the exit doors triggered by the Covid-19 pandemic.

“We have never seen a net outflow from corporate bonds of the same magnitude before,” said Fredrik Hard, an economist at the Swedish Investment Fund Association, which compiled the data going back six years.

The scale of monthly redemptions represents a staggering 13% of the 180 billion kronor that was invested in Swedish corporate bond funds at the end of February, according to the association.

The virus pandemic triggered a sell-off in European credit markets in March, with high-yield securities in the Nordic region being particularly exposed to price declines. But many Swedish investors keen to withdraw their savings found out they couldn’t, after 35 funds suspended trading due to an inability to establish fair market pricing for their assets.

That has led to widespread calls to better reflect liquidity and credit risks in fund fact sheets in Sweden, and has also shone a spotlight on the role banks play in the corporate credit market.

“The market maker function of the banks has been much reduced compared to a couple of decades ago,” said Fredrik Nordstrom, the association’s chief executive officer. “They used to be on one side of this market and had a much larger ability to take positions, so they could take on the risk when someone else wanted to sell.”

The costs for banks to trade corporate bonds have increased as a result of higher capital requirements, according to Nordstrom, who also said: “banks now have less ability to handle short-term risks in the market as they need to find a buyer of bonds directly.”

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