Riksbank Releases Credit Market Memo in Wake of BlackRock Furor

The Riksbank took a step toward greater transparency after it was slammed by investors for keeping secret the contents of a BlackRock analysis into Sweden’s credit market.

In a 22-page memo compiled by a Riksbank staffer at its financial stability unit, the bank concludes that Sweden’s corporate bond market is prone to a number of shortcomings that distinguish it from other markets.

Read: Sweden Heavily Redacts BlackRock Report on Credit Market Woes

The analysis is being shared with the market roughly a fortnight after the Riksbank refused to make public the contents of a report conducted by BlackRock consultants. That work was supposed to support policy makers as they embark on their first ever corporate bond purchases as part of expanded stimulus measures.

Read: Swedish Bond Secrecy Is Needed to Protect Market, Riksbank Says

The Riksbank’s memo lists a number of factors that “may have contributed to the very high stress level during spring 2020.” In March, 35 fixed-income funds gated to prevent an investor exodus amid plunging bond prices. The ensuing panic also froze the new issue market for several weeks.

“The Swedish market for corporate bonds is relatively small with many small players and limited liquidity. The price picture is also uncertain due to a lack of transparency in pricing and trading. Furthermore, it is difficult to assess credit risks as many issuers do not have a credit rating,” according to the memo.

Trading conditions in Sweden played a key role in the crisis, according to the memo. It notes there are only “ten or so participants” in the Swedish secondary market comprising banks and bond brokers.

Memo Highlights:
  • Required rate of return for Swedish corporate bonds accommodates a larger liquidity premium than it does for European or U.S. bonds
  • Banks and bond brokers hold a small proportion of bonds in the form of smaller trading books
  • Sweden lacks certain categories of investor that can be found in Europe or U.S., for example ETFs
  • The problem of bond price reliability has been around for quite some time
  • Screen prices of bonds are not always fully updated with all the available information; in the U.S., trades must be reported within 15 minutes
  • In Sweden, unrated issuers were responsible for about half of outstanding corporate bond volumes, while the corresponding figure for the euro area was just over 15%

The market shortcomings listed in the memo are now being discussed in parliament and within the Financial Supervisory Authority in Stockholm.

In September, the financial watchdog asked the Swedish Securities Markets Association to “quickly investigate” the issue of transparency and come up with proposals within two months.

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