Beleaguered Bond Traders Pin Their Hopes on Swedish Speed Trains

(Bloomberg) -- For countries, not having a lot of debt is generally a good thing. For bond traders, it’s another story.

In Sweden, a government surplus and central-bank bond purchases have depleted the nation’s supply of tradable bonds. That’s why a high-speed railway project is now being looked upon as a potential boon for the nation’s bond market.

The project to build a high-speed rail link connecting Sweden’s three major cities could cost 230 billion kronor ($29 billion), according to a proposal by a government committee. While no formal decision is likely to be made in this election year, a number of factors suggest that politicians could be ready to take the spending plunge, according to Nordea Bank AB.

“The need to catch up in infrastructure investments is now a consensus view in the public opinion and it’s difficult to quickly find large infrastructure projects,” Mats Hyden, a strategist at Nordea, said in an interview.

Such a public investment, and the borrowing that would fund it, could provide a needed liquidity injection for Sweden’s government bond market. Liquidity has worsened significantly as the Riksbank has soaked up close to 40 percent of the market through a quantitative easing program that began in early 2015. At the same time, an economic boom has caused tax revenue to soar, resulting in big budget surpluses.

The budget surplus for 2017 reached 61.8 billion kronor, blowing away the 28.3 billion forecast the debt office had predicted in October. The agency expects a surplus of 47 billion kronor this year and a bigger one in 2019. It also anticipated it will issue about 40 billion kronor in nominal bonds this year, an estimate that will likely need to be lowered.

Hans Lindblad, the director general of the Swedish debt office, on Thursday indicated that the agency is looking at potentially changing its forecast.

“Of course there’s a risk that the borrowing need will have to be revised lower when much more money is pouring in compared with what we had forecast,” he said to reporters after an open hearing in parliament.

Sweden’s debt ratio has dropped to levels not seen since the 1970s, and is anticipated by the government to fall as low as 32.5 percent by the end of the decade.

But whatever the issuance, it will likely be gobbled up by the central bank, which has said it will buy 40 billion kronor in bonds this year and 25 billion kronor next year.

“Assessing the liquidity situation today is deceptive,” Hyden said. “The market is well-functioning, but the calm is deceiving. A long time of low interest rates and falling risk premiums means that the market’s functioning is untested for periods of rising interest rates and rising uncertainty.”

So back to the speed trains. As presented by the committee, support for the project is divided. The governing Social Democrats have yet to decide, while their partner, the Greens, are in favor. The biggest opposition party, the Moderates, is opposed, but the smaller Center Party is willing to back the plans.

Those in favor argue that, with negative real interest rates, the timing could hardly be better as the government effectively would be paid for taking the loans. Borrowing in the bond markets would also speed up the project.

“Sweden should borrow to finance the construction so that it’s ready by 2035,” Anders Akesson, the infrastructure policy spokesman for the Center Party, said in a statement. Financing the traditional way over the budget each year, would mean that the project won’t be finished until the 2090s, he said.

The government is expected to present a proposal on the matter this spring.

©2018 Bloomberg L.P.

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