SWEDEN - Pension funds and life companies, which are on average significantly overweight in mortgage bonds, look set to sell off the assets and buy long dated euro bonds on the back of the revised "traffic light" solvency tests unveiled by the Swedish Financial Supervisory Authority (SFSA) in October.
Johan Elmquist (pictured), vice president, business development executive, Nordic region, at T.Rowe Price, said the revised model could also trigger corporate bond issuance in Sweden.
The new model only makes use of the “red” status, whereas previous models used two scenarios. The regulator also made some changes to the stress tests, in short lowering stress levels for all asset classes except credit risk; however euro-denominated fixed income has been treated more favourably with the abolition of the “yellow” light.
“We will see Swedish institutions selling out of Swedish mortgage bonds and buying corporate bonds,” Elmquist predicted.
“I also expect that the new regulations will trigger more issues in Swedish kroner. Pension funds will either buy European corporate bonds and swap them back to Swedish kroner or buy Swedish corporate bonds.”
Gunnar Balsvik, president, Kåpan Pensioner, said buying European bonds had become more attractive under the revised model.
“Since [the SFSA] made mortgage bonds more expensive from a risk perspective obviously we will consider [selling them] going forward,” he said.
“We haven’t analysed the new model fully but it looks like we’re going to buy long euro bonds and sell Swedish mortgage bonds. You don’t have the long bonds in the Swedish market, so buying euro bonds is an obvious way for us to hedge the interest rate [risk]. Also, the return on the mortgage bonds is quite limited, the spread is so tight, so it might not be worth [holding them].”
Balsvik was less optimistic about the emergence of a corporate bond market in Sweden, adding: “Swedish listed companies have very little debt on their balance sheet.”
The new model divides equity risk into Swedish and foreign equities with insurance companies and occupational pension funds required to withstand a price fall of 40% for their Swedish equities and 35% for their foreign equities.
Real estate risk is measured in terms of a price fall of 35%, rather than of 40%, the exchange rate risk is measured in terms of a change of 10% rather than of 12%, as stated in Draft 2 and the real interest-rate risk is included in the model.The model will be finalised in mid-November.
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