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Good stability in volatile fixed income market

During a spring which has at times been turbulent, a lot has happened in the fixed income market. Not least, interest rates have risen rapidly. How does Kommuninvest orient itself in a changing environment? Maria Viimne, Deputy CEO and COO, clarifies her perspective on the situation.

How should we understand the dynamics in the market?

– As this year started, we saw a fairly strong recovery after the pandemic. Growth was high and unemployment was coming down. But inflation had begun to pick up in many places. There were also supply problems and other disruptions in world trade.

Immediately after the Russian invasion of Ukraine, there was general uncertainty in the market for a few weeks. It was not clear what consequences the war would have. Stock markets began to fall. When this initial uncertainty subsided, it became increasingly clear that the war would drive inflation, cause further trade disruptions and weaken the economy. In the last two months, there has been much focus on the series of interest rate hikes that leading central banks have begun to implement in order to reduce inflation. Stock markets have continued to fall. There has been a rapid transition from an environment of distinctly low interest rate to more normal interest rate levels. In that phase, developments have at times been volatile.

How are Kommuninvest’s volumes and results affected?

– We have had good stability in our funding. We have made transactions with positive results in all three of our strategic markets: SEK, USD and EUR. But some other issuers – a number of them in the municipal sector – have faced challenges. Issuers in the municipal sector have from time to time during the spring concluded that the market has not been that attractive. Some of them have then turned to us. This has contributed to a slightly higher lending growth for us than initially expected.

We have a basic structure that has always proved solid when markets have gone turbulent. The volatility in recent months has resulted in relatively large collateral flows. But that can be handled without difficulty. We have a strong capital base, a large liquidity buffer and well-established funding operations in our strategic markets. This gives us good access and prices. We have had no problems in standing firm.

In terms of financial performance, the risk tax is a new and large burden for 2022. We have also seen that our unrealized changes in market values have developed negatively. These have primarily been attributable to funding in USD having become cheaper relative to funding in SEK. However, since we intend to hold assets and liabilities to maturity, such values are not normally realized. Nevertheless, the effects must be taken into account. The combination of these two factors imply that we are moving towards a negative operating profit for the first half of the year. At the same time, the operating income is developing as expected.

What should we expect from the near future?

– I think there are good reasons to believe that the fixed income market will gradually adapt to new conditions. The trend of rising interest rates is likely to continue. I also believe that we should expect a longer period of uncertainty. But over time, at least in the long run, things tend to fall into place.

Having said that, it is certainly the case that new upheavals in the outside world – for example linked to the war in Ukraine – could significantly escalate stress levels again. It is very difficult to predict where all of this will go.