Credit market dysfunction in Sweden brings benefits to some

Bloomberg

The dysfunction in Sweden’s credit market is creating opportunities for investors ready to take advantage of murky pricing and unreliable liquidity.
Niklas Edman, a portfolio manager at Carnegie Fonder AB, says that market features such as illiquidity, a lack of transparency and price volatility are “not only a risk or threat, they can also pose an opportunity.”
Given the current state of the Swedish credit market, Edman, who helps oversee about $9 billion at Stockholm-based Carnegie Fonder, says that “one should be compensated for these risks, perceived or real, by higher spreads.”
In March, Carnegie Fonder was among 35 Swedish fixed-income funds to temporarily halt investor redemptions as bond prices plunged due to the panic triggered by the coronavirus pandemic.
Even so, Edman says the existing mechanisms for pricing Carnegie’s funds are “robust.” He even goes so far as to add that they “worked well during the volatile part of the spring.”
But the fund manager says the crisis exposed holes in Sweden’s credit market, particularly around pricing, liquidity and transparency.
With only a limited number of firms actively quoting prices, Edman says “the valuation becomes challenging, in the sense that you do not have an official closing price like the stock market.”
Asset managers such as Carnegie Fonder can hold up to 500 bonds across funds, so “it is important that the valuation is done by a third party,” Edman said. He points to Norway as a possible model for Sweden to copy. There, a company called Nordic Bond Pricing provides a daily independent price for bonds, a standard that Sweden has yet to introduce.
A lack of liquidity, or the ability to buy and sell bonds, is no worse in the Nordic region than in the rest of the world, according to Edman. “Markets have increased dramatically in size, while the buffers — in terms of banks providing balance sheet — have stayed the same,” he said.
Scandinavia’s credit market is “less mature” than its counterparts in the US or continental Europe, which are characterized by features such as a repo market or tradeable indexes, Edman said.
But he also says that, if an investor in Sweden’s credit market is “selective,” it’s possible to “avoid credit events, while still being rewarded higher spreads.”