Riksbank Begins Its Most Controversial Leg of QE Program

Swedens central bank will today make good on its promise to enter the corporate bond market, as it begins buying 10 billion kronor ($1.1 billion) worth of securities.

But the move, which the Riksbank says will rein in funding costs for businesses and help contain credit supply shocks, has courted controversy ever since it was announced in July.

Some investors have questioned the timing of the purchases, which come six months after Swedens credit market was brought to its knees by Covid-induced panic selling. Since then, the market has largely recovered and a wide range of companies are raising debt as credit spreads narrow.

“I do not think they need to start buying now,” said Strand Kapitalforvaltning‘s portfolio manager Carl Johan Lagercrantz, who added that it’s “positive” that the program is in place.

Another point of contention is the scale of the purchases. Some market participants say that $1.1 billion isnt going to have a material effect in a domestic bond market estimated to be worth $45 billion.

Then there‘s the issue of how it will impact transparency in the corporate bond market -- something the country’s financial watchdog has said must be improved in the wake of the crisis. The banks QE plan “will incentivize rating shopping,” Danske Bank analysts said earlier this month, as issuers turn to ratings companies that are more likely to give them favorable grades.

There‘s also some concern the Riksbank’s purchases will distort prices, after similar programs upended pricing in Swedens covered and government bond markets.

Even the legality of the program has been questioned. In May, the top expert advising the parliament committee that oversees the Riksbank said such purchases were off limits under existing law.

But the corporate QE program also has its backers, and many welcome the purchases as a mechanism for dealing with future shocks.

Lars Lonnquist, a portfolio manager at Spiltan Fonder, said, “The signal value of the Riksbank developing this tool is significant as it means that the next time the market shakes, the tool can be activated relatively quickly with amounts that far exceed the now decided framework.”

Still, the question of timing remains. Fredrik Tauson, a fund manager at Nordic Cross Asset Management, asks whether it wouldn‘t have “been enough for the Riksbank to communicate that now it’s in place and ready to be used if we see future needs for it.”