By Svein Aage Aanes, DNB Asset Management – The Nordic bond markets are currently worth a closer look, and the market environment is particularly promising for high-yield bonds. We are in a transition from rate hikes to rate cuts – and in such phases bonds tend to perform strongly. As central banks grow comfortable with the stabilisation of inflation, they are likely to take their foot off the monetary policy brake a little, but without switching to an expansionary monetary policy. Both the Swedish and Norwegian central banks are expected to cut interest rates this year. It is quite likely that the Riksbank will act before Norges Bank and lower its interest rate for the first time in the second quarter. In Norway, the first rate cut is likely to take place sometime in Q4.
The Nordic bond markets are currently worth a closer look, and the market environment is particularly promising for high-yield bonds.
Svein Aage Aanes
In view of the economic development, it would be a remarkable monetary policy achievement if the central banks were able to survive the first real test of an inflation shock since the introduction of the modern monetary policy paradigm without leading the economies into a recession. There is currently much to be said in favour of this. Nevertheless, it cannot be ruled out that the overall impact of the interest rate hikes of the past two years could lead to a more severe downturn than the markets are currently forecasting.
Credit spreads for Nordic high-yield bonds are at around 500 basis points
In terms of the bond market, the year has started strongly on the issuance side – and this trend is expected to continue. In view of the banks’ financing requirements, 2024 is unlikely to be a record year, but on the whole it should be a strong year for issuance. At around 500 basis points, the credit spreads for Nordic high-yield bonds are still at attractive levels in relative to history and have the potential to narrow further this year. The yield in this segment is presently in the 9-9.5 percent range.
At around 500 basis points, the credit spreads for Nordic high-yield bonds are still at attractive levels in relative to history and have the potential to narrow further this year.
Svein Aage Aanes
It should be noted that both the interest rate duration of around one year and the credit duration of around two years in high yield are quite short. The comparatively short capital commitment period has already been a reason why Nordic high-yield bonds have performed decently over the past four and five years. Currently, the real estate and diversified financials sectors are particularly promising. On the other hand, oil service providers and some sub-sectors of the shipping industry have become more expensive after two years of strong performance and do not offer much of a buffer for surprises in terms of their credit spreads. On the other hand, the outlook for these sectors is still quite strong.
Good opportunities for a strong bond year
The yield on investment-grade bond funds is just over 5 percent and the credit spread is between 105 and 120 basis points, depending on the product type. Compared to historical spread levels, most sectors look decent here. The real estate sector is also particularly interesting here, as credit spreads in this sector widened significantly in 2022 and are still quite high.
Despite the positive environment, there are risks of short-term setbacks due to the very strong performance in the fourth quarter of last year. The markets priced in relatively aggressive interest rate cuts by most central banks towards the end of 2023. As interest rates have increased at the start of 2024 the pricing is now more in line with the signals from the central banks. The Nordic region would not be immune to a global economic hard landing – even though the Nordics were among the best performing economies in relative terms during the global financial crisis of 2007/2008 and the pandemic. In principle, however, we believe that a strong bond year is quite likely.
