Bond Traders Warned They’re Out of Step With Riksbank’s Reality

(Bloomberg) -- Bond traders have decided bad things are about to happen. But in Sweden, the governor of the central bank says the economic data he’s looking at doesn’t support their case.

The yield on Swedish 10-year government bonds was negative earlier on Wednesday, as is the case across much of western Europe and in Japan. That’s a clear warning sign about the state of the global economy.

Stefan Ingves, who has fought off crisis after crisis over 30 years in public service at the Riksbank, the Swedish government and the International Monetary Fund, says there’s no real reason why Swedish 10-year yields should be below zero.

“It’s not in line with our projections on the macro picture, so eventually something will have to give,” he said in an interview after a press conference in Stockholm. “Either they are right,” he said, referring to bond traders, “and something bad will happen around the corner -- we just can’t see that presently, so we have a different view.”

On Wednesday, Ingves and his colleagues underscored their intention to raise rates again toward the end of year, following a hike in December. That’s despite clear signals from the world’s major central banks that they think it’s time to embrace even more stimulus.

But with inflation at target and the Swedish economy still “reasonably good,” Ingves said he can now afford to “deviate” from the monetary policy trajectory of the Federal Reserve and European Central Bank. Ingves also makes clear he still considers the Riksbank’s current policy position to be very supportive.

“We have come from a very, very low level and we are staying at minus 0.25%, and in addition to that we have bought roughly 40% of the outstanding amount of government debt and that’s a very expansionary monetary policy,” he said.

Against that backdrop, Ingves says that “it’s not all that strange, at least in my view, to slowly move toward zero and positive territory” in central bank interest rates.

But the Riksbank has a patchy history when it comes to timing its shifts in monetary policy. Ingves was optimistic enough in September 2008 to raise rates, just before the collapse of Lehman Brothers sent the global economy into a tailspin. He has also fielded criticism for raising rates during the darkest hours of Europe’s debt crisis, in 2010 and 2011.

More recently, some market participants have complained that the Riksbank has already missed its opportunity to raise, and now risks tightening when the rest of the rich world is moving in the opposite direction.

To contact the reporter on this story: Amanda Billner in Stockholm at abillner@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Tasneem Hanfi Brögger

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