Sweden is unique in having two covered bond markets — the large domestic bostadsobligationer market and the brand new, internationalised säkerställda obligationer. The euro denominated market has got off to a flying start since October, helped by investors' urgency for credit diversification and a favourable basis swap.
While many covered bond markets have underperformed in terms of issuance since the beginning of this year, the nascent Swedish sector of the euro jumbo market has outperformed in two respects.
Firstly, issuance of säkerställda obligationer has exceeded expectations. From a standing start in October, three Swedish issuers have launched Eu9.5bn of covered bonds between them, in eight issues ranging from two to seven years. In January Swedish supply was third only to Germany and Spain, and accounted for 21% of issuance.
In spite of this, Swedish issuers have been able to command pricing as tight as almost anyone else.
When Stadshypotek, Svenska Handelsbanken's subsidiary, launched a Eu1.5bn three year issue in January, for example, its pricing of mid-swaps minus 6bp was flat to where Eurohypo, one of the most established names in the market, had priced a Eu2.5bn jumbo public sector Pfandbrief a week earlier.
"Eurohypo is a benchmark issuer and clearly has a much bigger investor base," said a syndicate official at one of the leads, "but Stadshypotek offers diversification."
Like Stadshypotek, the Swedish Covered Bond Corp, a subsidiary of SBAB, has raised Eu3.5bn in euros, albeit through three issues in four months, rather than two in two months.
Not only is Swedish issuance higher than most market participants expected, but it is also higher than the issuers themselves were anticipating.
Per-Åke Nyberg, treasurer at SBAB in Stockholm, says the bank had been expecting to launch its third issue, a Eu1.5bn three year, towards the summer, but accelerated its plans to tap the market in late January. "We realised that there was little supply, redemptions were high, and that demand was very strong as a result," he says.
The key reason for the high level of issuance from Sweden is that funding levels have compared so well with what the issuers can achieve in their domestic Swedish krona market.
In the year before their arrival in the euro market, Swedish banks had benefited from an impressive performance of their domestic paper versus Stibor, the local benchmark, suggesting that while investor diversification would attract issuers to the euro market, unfavourable arbitrage might curb their enthusiasm.
However, the valuations that euro investors have placed on Swedish covered bonds, combined with a favourable basis swap from euros into kronor, have meant that euros have given Swedish banks both investor diversification and cheaper funding.
SCBC's three year, for example, was estimated by one banker to have saved the issuer 1bp versus comparable funding in Swedish kronor.
Home market highly liquid
The level of supply from Sweden also needs to be seen in the context of the size and development of its domestic market, which until the new covered bond law was introduced in 2004 consisted of old-style mortgage bonds, or bostadsobligationer (BO).
"The mortgage banks use bond issues to cover more than 50% of their refinancing requirements, which illustrates the importance of the BO and new covered bond market," said analysts at Dresdner Kleinwort in November. "As at end-2005, outstanding bostadsobligationer volume totalled the equivalent of more than Eu90bn.
"Here, issuers are represented in particular with benchmark series, where they constantly carry out taps to provide new volume and for which a group of dedicated market makers provides market support. According to Riksbank, the average daily turnover in the overall market worked out at the equivalent of around Eu1bn in 2005, which indicates a high level of liquidity."
There had been questions whether or not the Swedes would introduce elements of their domestic market into the euro market.
However, this has not happened and Ola Littorin, first vice president and head of long term funding at Nordea Hypotek in Stockholm, says that although there may be valuable lessons each market can learn from the other, each works perfectly well and so there is no need to change them.
Nordea Hypotek opened the market in October with the tightest inaugural covered bond from a new country, a Eu1.25bn five year issue that ABN Amro, HSBC, Nordea and UniCredit priced at 4bp through mid-swaps.
This has led Nordea Hyp to raise its planned issuance in euros from one benchmark a year to two, so it could make a second appearance in 2007 after issuing a Eu1.25bn seven year in January.
SCBC has said that it will probably return to euros in the autumn, and Stadshypotek is expected to launch a second jumbo this year.
Further supply could come from new entrants, who are probably more eager to issue in euros than before their peers' impressive debuts.
Swedbank Hypotek (formerly AB Spintab), the country's second biggest mortgage lender, and Länsförsäkringar Hypotek, which has only a 2% market share, have both applied for covered bond licences, and SEB Bolån could also enter the market this year.
Should all three appear as expected, banks with a combined share of 96% of the Swedish mortgage market would be active in euros.