Negative Yields on the Longest Bonds Trigger a Warning in Sweden

(Bloomberg) -- In Scandinavia, where unemployment is low, inflation is rising and the economies are growing, bond traders are bracing for gloom.

On Wednesday, the Danish central bank drew attention to an historic event in its debt markets as yields on 20-year government bonds went negative for the first time. In neighboring Sweden, yields on 10-year bonds have been hovering around zero since mid-June. The development has been dubbed “absurd” by one economist, while the head of Sweden’s central bank says he doesn’t know what’s motivating bond traders.

Stefan Ingves, the governor of the Riksbank in Stockholm, said the economic data he’s looking at is very different from the signals coming from the bond market. After fighting off multiple economic crises during roughly three decades as a public servant, Ingves 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 on Wednesday. “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.”

The Riksbank on Wednesday repeated its intention to raise rates around the end of the year after a long economic expansion. 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 afford to “deviate” from the monetary policy trajectory of the Federal Reserve and European Central Bank.

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.

For now, the market is approaching Ingves’s message with some skepticism. In a client note, Swedbank said that “the market remains convinced that the Riksbank won’t deliver on its policy forecast.”

Time will tell who’s right. 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.

Nordea Bank Abp’s chief analyst, Torbjorn Isaksson, said the central bank is too optimistic on inflation and the economy in general. The “message from the Riksbank reduces the probability for easing measures, while any rate hike still seems remote,” he said. “We expect the Riksbank to stay on hold both this year and the next year.”

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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