VIDEO | Largely, corporate bonds can be a great instrument both for the investors and the companies who issue them. But liquidity can be scarce at times, as was seen at the outbreak of the pandemic. The problem exists across Europe but for this session we zoom in on Sweden. In Stockholm, Fredrik Bonthron, Chief Economist of the Swedish Securities Market Association, joined to offer an overview of the scene, as well as a current update.
Swedish corporates have been replacing bank loans with an increasing share of corporate-bond financing over the last decades, and total value of their outstanding bonds have nearly tripled. With this the industry around them has matured, too, with agents for small issuers, more lower-rating issuers etc.
The commercial real estate sector has become the dominant issuer type – worrying regulators as it means concentration in two directions: bond financing being critical to real estate companies, and real estate companies weighing disproportionately heavily in the bond market portfolio.
New self-regulation on transparency
While increasingly important, the corporate bonds stay sensitive to tough times though, both in terms of risk premiums, which can spike suddenly, and market liquidity, where demand can dry up badly at the same time that many investors would have been most eager to convert to cash. Compared with government bonds and covered bonds, the secondary market turnover for the corporate ones are just a tiny fraction. So could regulation be put up to guarantee increased liquidity? Fredrik Bonthron’s answer is a determined no.
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“Liquidity is not a thing you can force on the market,” he says.
The liquidity is also linked (in a somewhat complex way) with the issue of market transparency, which MiFID II and MiFIR were meant to improve but actually got worse. In Sweden, a self-regulation initiative under the Swedish Securities Markets Association aims to fix it. A majority of survey respondents found that transparency has increased with the self regulation, though it could not be established that it had an effect on the market liquidity.
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