Riksbank’s Covered-Bond Strategy Has $24 Billion Manager Worried

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Investors are starting to worry that the Riksbank’s purchases of covered bonds are fanning a housing market that’s already red hot.

Owen Winrow, who helps manage 195 billion kronor ($24 billion) at Afa Forsakring, says his concern is that “with a housing market on fire,” the Riksbank “might be playing a dangerous game.”

Winrow also notes that the Riksbank has probably reached the limit of what it can do with its quantitative easing program for government bonds, “so there isn’t too much choice, I guess, than buying covered” bonds, he said.

Sweden’s central bank said on Wednesday it expects to have bought 70 billion kronor of covered bonds this quarter, and another 60 billion kronor in the three months though June. The asset class makes up the largest chunk of the Riksbank’s pandemic QE program, which is worth 700 billion kronor in total.

The bank, which expects its main interest rate to stay at zero into 2024, also took the opportunity to warn of risks lurking in Sweden’s housing market. It pointed to rising prices and debt levels, which it says are “making households even more sensitive to both price falls on the housing market and rising interest costs.”

Last month saw Swedish apartment prices rise by 7% from a year earlier, while house prices increased by 13%, according to data from Svensk Maklarstatistik. 64% of respondents in a recent poll by SEB predicted rising housing prices in the coming year.

“The QE purchases remain heavily focused on covered bonds,” analysts at Danske Bank wrote in a client note. “This will keep covered bond spreads compressed, in our view.”

For investors like Winrow, that’s making covered bonds less appealing.

“The central bank is certainly forcing us to at least look at other types of fixed-income assets,” he said.

©2021 Bloomberg L.P.

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