Sweden’s Government bond market is the safest in the world, according to ING Investment Management.

Using its proprietary scoring matrix, ING IM has analysed data over the last ten years, and in all but one year, Sweden ranked first in the world. When considering sovereign credit risk factors, such as solvency risk, external dependency and environmental, social issues and governance, in order to gauge the ability and willingness to service debt, Sweden came out on top.

“The top three spots have consistently been taken by the Nordics – Sweden, Denmark and Finland – making it the bond market’s credit safest region in the world in the last decade. Sweden’s debt-to-gross domestic product ratio stands below 40 per cent and is one of the lowest in the world. The country is amongst the few high-income countries that in its recent past have been able to generate government surpluses,” said Thede Ruest, fund manager, ING IM.

“Sweden’s external dependency is very low due to its large and sustained current account surpluses – most recently at around 7 per cent of total GDP. Sweden, unlike members of the European monetary zone, has its own country specific policy framework (fiscal, monetary and macro prudential) and its “own” currency – the Swedish Krona - that allows for substantial flexibility to control funding costs,” said Ruest.

However, while ING IM believes Sweden has the safest government bond market in the world, it does not state that it is entirely free of danger. The risk identified by the firm is high household leverage, which is seen to be a key risk factor to the financial sector, and thus to public finances.

“In an adverse scenario where house prices come under pressure, asset values decline and unemployment rises, households could find themselves in a situation where it becomes difficult to service debt. Swedish gross household debt rose between 2000 and 2010-more than 40 per cent-as a share of GDP to an estimated 140 per cent,” ING IM said.

In a tactical move, ING IM has bought Swedish interest rate securities that it says profit from Riksbank rate cuts, and currently, the holdings are above historical average. On a small scale, the firm has seen clients strategically shifting exposure away from perceived sovereign credit risks within the eurozone, and towards the Swedish government bond markets, as well as other Scandinavian areas.

“Our base case is that the Swedish curve will continue to steepen as the Riksbank will provide further monetary stimulus. Monetary policy will result in downward pressure on yield levels in the Swedish front end, but the Swedish government bond market will remain the default safest in the world for the foreseeable future,” said Ruest.

The “safe treasury bucket”

When a client’s aim is to reduce sovereign default risk, ING IM actively supports Sweden as a component of a diversified portfolio, which it terms as “Safe Treasury Bucket”. Other such “safe” nations are Sweden, Denmark, Finland, Germany, New Zealand, Australia, UK, Netherlands, Canada and Austria.

“From a tactical perspective we only look at the Swedish rates market as Finland, Denmark and Norway are not liquid enough to get meaningful active positioning. Of course, from a longer term strategic buy-and- hold perspective, as previously mentioned, those markets are very interesting,” said Reust.

ING IM notes that the Riksbank has cut its main rate in December last year to 1.0 per cent, as the central bank judged that the Swedish economy slowed more than previously expected. This slowdown is mainly due to slowing European export demand. GDP is therefore expected to increase at a slower pace, while unemployment is set to rise slightly more than was previously anticipated. At the same time, inflationary pressures are expected to be lower.

“Sweden is to a large part dependent on external developments in particular within the eurozone. ING IM believes economic growth in Europe to be stronger then market consensus and state that the 10 year Swedish rate levels should moderately rise from current levels,” the firm said.