The director of rates sales at Nordea Markets speaks to Global Trading about Swedish market trends, what non-Nordic investors are attracted to in the region and where local markets are headed next.
What trends are you seeing in the Nordic markets?
We’re seeing a slight pickup in terms of the local government and current bond market in the Scandis. DKK has been quite active. They haven’t had QE to the same extent that we have. We’re also seeing a bit of pick up in the NOK market. At least for the banks, we can see a trend that they’re more focused on issuing in their core currencies rather than cross-border funding.
Turnover is still low. At least in cash bonds, it’s probably going to stay fairly low in the Swedish market.
What changes have you seen in the Nordic markets over the last five to 10 years?
There have been a few. There has been the move from OTC to clearing when it comes to IRS, which has been a huge change. There’s been a general removal of more active engagement trading. We used to have more local hedge funds that were very dominant, and are not anymore. That type of high turnover flow has come down quite a lot. The players that are active in that space are generally smaller.
The large portion of QE in the SGBs has made it less interesting, less attractive and more expensive to trade for foreign accounts. The market has become more focused on the ‘beta aspects’; you have your benchmark, how are you trading versus your benchmark? Am I creating the position I want versus my benchmark, by maybe just not doing anything
What notable regulatory changes have you seen in that timeframe?
MiFID, of course, was big. One change you can see is the emergence of all these private research hubs doing their own thing. As a bank, running an intermediary or a market making platform has become more expensive.
How are international investors being attracted to the Nordic region?
For non-Nordic investors, the Danish callable market can be very intriguing. It’s a huge market and has an interesting type of structure, so it attracts a fair bit of foreign attention. It used to have very large Japanese participation, which has deteriorated. SEK and NOK have a nice combination of being correlated to both euro and dollar. You can use the different correlation strengths, and create spreads that can work quite well and bring nice features that are different from traditional big spreads.
The Swedish govie market used to be quite popular for international accounts, but outstanding notional has decreased and all real money AUM has grown quite vastly due to public and private equity performance. That has created an even smaller free flow. Even if a Swedish real money account is in some way short of govies, they still need to hold a lot more than they did back when their total AUM was 25% less.
Do the Nordics have an innovative culture? How is technology developing in the region?
I would have hoped to see more innovation in Sweden, to be honest. Stockholm used to be a fairly big hub for innovation. We were quite dominant in rates, hedge funds, and things were sprawling around that. Now, there’s more to be hoped for when it comes to innovation. A lot of the focus has been on payments, and providing alternative mortgage-backed factors for the retail segment.
When it comes to markets, Sweden is very credit focused. We like equities, we like high yield bonds. If you look at the Danish market, they’re much more leveraged focused. They prefer having a AAA name with gearing, having that risk, whereas in Sweden we prefer taking more credit risks. We prefer holding equities or high yield bonds, without leverage.
How is the Nordic region approaching liquidity fragmentation issues?
It’s a huge question. At the moment, there is nothing being done on the regulatory side. From the issuer side, large issuers with very strong credit can scapegoat deteriorating liquidity. For investors, there are a few different investor collectives, but a large portion can also demand a better spread for poor liquidity. It will be interesting what the actual impact is after FRTB implementation.
It’ll be impactful, and I don’t think anyone can say that it’s going to be positive. Then the question is, how will it land? I think it’ll mean that you’ll need to pool resources to those areas that are most liquid. So there will maybe be a preference for swaps before bond futures, because they have more market making participants. We’ll probably see a divergence of credit spreads, names that have been perceived to be trading the same might see a bit of divergence.
What’s next for the Nordics? What needs to change in the markets?
From a market-making perspective, a focus is going to be how and whether we can increase turnover. How do we do price production, how do we provide the possibility to turn over inventory. When turnover is low, and when you can’t scapegoat that turnover, it becomes more expensive.
Local markets have a tendency to become more broker-oriented. That’s fine, but the sizes needing to be done don’t cater to a brokerage-type of marketplace. We need more fungibility. At the moment, the residual risk held compared to the turnover means that if I want to sell or buy, I can get a price fixed in and execute quickly. But going forward, I think there might be risk that it could become more brokered, with longer lags.
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