No, not north to German bunds. Further north.
Pär Magnusson and Filip Andersson — Scandinavian macro and fixed income analysts at RBS — have a few things they want to get off their chest at the moment, clearly. As they write (emphasis and link ours):
In a sovereign bond market that is becoming more binary by the day (will they default or won’t they? will they bail the others out, or won’t they?), where good-quality and poor-quality debt will become even more differentiated, it is a pleasure to argue for Swedish and Norwegian bonds…
John Maynard Keynes, who was a rather able trader in his day, once remarked that “the market can remain irrational for longer than you can remain solvent.” This is very true, but it will not keep us from pointing out some glaring errors in the market’s valuation of sovereign credit risk. For instance, we believe it is completely indefensible that a 5yr Swedish government bond trades 55bp above a corresponding French government bond.
Even more absurd is the 10yr government bond spread between the net state wealth nation Norway and the 100% state debt/GDP nation Belgium. In basis swapped terms into euros, you currently receive an extra compensation of 40bp for lending money to Belgium instead of Norway. What real money investor thinks that is a good enough risk/reward?
Timely stuff, as evidence piles up for corrosion among the eurozone core sovereign credits like France and Belgium. One thing leaps out especially — both Norway and Sweden run fiscal surpluses.
Obviously then, neither country issues a lot of debt precisely because of this good fiscal behaviour — joining an elite of similar sovereigns such as Australia or Denmark. This could actually be a problem if you’re worried about your assets being liquid, not just creditworthy. We know this was a problem for the Basel Committee on Banking Supervision in building the new Liquidity Coverage Ratio for banks, for example, so it’s well worth bearing in mind.
The point RBS are making though is that a long-term focus on credit quality now trumps the relative rarity of Scandinavian debt over its eurozone counterparts — cue buying Sweden and selling France, and even buying Norway and selling Germany. As RBS note (click chart to enlarge)
We are, of course, keenly aware that Norwegian government bonds are rather scarce and that they may be tough to trade from time to time, but for real money investors with a longer perspective, we see very good reason to enter the NGB market as we enter a year that probably will deliver more sovereign risk turmoil internationally. The direction of Norwegian 10yr bonds relative sovereign risk is exemplified by the Spain-Norway spread below…
It can’t go wrong if you’re in the market for a super safe haven, right?
Right?
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We’d strongly remind investors to remember Willem Buiter’s warning from the depths of the euro crisis in 2010 (and which he only recently repeated): no sovereign is safe.
Scandinavian exposure to bailing out the periphery exists — Sweden’s lending €600m to the Irish rescue — and of course, trade and exports will suffer from peripheral austerity. Still, compared to what the core’s facing in the eurozone on the same metrics, it’s a walk in the park.
To their credit though, Magnusson and Andersson are pretty upfront about two caveats. First, Sweden is an export economy, Norway is a commodity economy, so adjust the macro accordingly; secondly, there are private debt problems facing both Sweden and Norway that need to be watched in themselves. Try these datapoints for size:
As of this writing, Swedish houses are arguably the most expensive in the Western world in relative terms. Average house prices as a share of disposable income are at the top of the list, and nowhere in the Western world have real house prices increased as much as in Sweden since the trough in 1996 (although Norwegian house prices have risen more since their trough)…
Although [Norway's] credit expansion has not been quite as aggressive as in Sweden over the past year, it is undoubtedly an issue worth monitoring. Annual growth in household debt of 6% is not sustainable in the long run, and it is likely to enter the reaction function at Norges Bank to a greater degree in 2011…
Of course, if you’re comparing matters to the eurozone, tightening of policy rates by the Norges Bank and the Riksbank in response to the mortgage markets in both countries contrasts with the probability of European Central Bank rates remaining at a forced low thanks to the crisis — something that euro shorts have been exploiting, as Reuters reported in December.
One last datapoint to note, incidentally: you might remember that Standard & Poor’s recently predicted there would be only two net sovereign creditors left after 2050. Saudi Arabia… and Norway.
Which really would be looking to the sovereign debt long term.
Related links:
Eurozone interest-rate hindsight – FT Alphaville
Bonds, breaking for the Swiss border – FT Alphaville