Swedish Manager Who Bought Junk at Crisis Lows Has New Trade

(Bloomberg) -- The head of fixed income at one of Sweden’s largest pension funds is selling investment-grade bonds that have seen their valuation soar amid central bank interventions.

Skandia’s Alexander Onica, a portfolio manager whose department oversees $28 billion of assets, is reducing exposure to “rated bonds down to BBB from real estate companies, banks, even industrial companies.”

These notes are trading with credit spreads that “are tighter now than before the Covid-19 crisis in February,” Onica said in an interview.

That’s a fundamental mispricing of risk, he says, and puts the blame squarely on the corporate bond purchase programs of the Federal Reserve, the European Central Bank and, closer to home, the Riksbank.

“Market forces have been put out of play,” Onica said. “Investors have bought into the central bank’s confidence and there’s no downside.”

In March, corporate bond prices in Europe cratered after the coronavirus outbreak shook investor confidence and froze new issuance markets. Sweden, where Skandia is based, was a case in point with 35 fixed-income funds gating in an attempt to stem record levels of redemptions.

Onica says the selloff was “quite unique, something that only happens every seven to eight years,” and it prompted his team to set up “a number of new mandates for credits going down to BB,” the highest rating bracket of junk bonds.

“In February and March we were quick to buy, having set up several billions worth of strategies to make those sort of purchases,” he said.

That approach looks to have paid off for Skandia with Nordic high-yield bonds almost back to where they traded before the crisis, having slumped as much as 30% in March.

Still, Onica remains wary about the general outlook for credit. “The fact that quantitative easing is still working is based on the market having confidence in central banks’ actions. Should they lose that confidence, it doesn’t matter how much QE you roll out.”

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