Author: Svein Aage Aanes, Head of Fixed Income at 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 rates for the first time in the second quarter. In Norway, this is likely to take until the end of the second quarter or even a bit later.
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 550 basis points
In terms of the bond market, the still young 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 550 basis points, the credit spreads for Norwegian high-yield bonds are still considerable in relation to historical levels and have the potential to narrow further this year. The yield in this segment is presently around 9,5 %.
It should be noted that both the interest rate duration of around one year and the credit duration of around two years are quite short. The comparatively short capital commitment period has already been a reason why Nordic high-yield bonds have outperformed their European counterparts over the past four and five years. Currently, the property and diversified financials sectors are particularly promising. On the other hand, oil service providers and some sub-sectors of the shipping industry have become 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 bonds is just over 5% and the credit spread is between 115 and 130 basis points, depending on the product type. Compared to historical spread levels, most sectors look good here. The property sector is also particularly interesting here, as credit spreads in this sector widened significantly in 2022 and are still 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.