Market for corporate bonds still vulnerable

News, Staff memo The corporate bond market has been hit particularly hard by the coronavirus pandemic in both Sweden and other countries. In this Staff Memo, the author provides a detailed picture of the events in March 2020 and onwards and highlights possible reasons why this market in particular was so badly affected.

Corporate bonds are generally riskier for investors than, for example, government bonds, municipal bonds and banks’ covered bonds (mortgage bonds). Not only does this means that investors demand a higher rate of return, but also that corporate bonds are more exposed if risk appetite on the financial markets deteriorates.

There are also a number of factors that distinguish the Swedish corporate bond market and these may have contributed to the very high stress level during spring 2020. For example, the Swedish market for corporate bonds is relatively small with many small players and limited liquidity. The price picture is also uncertain due to a lack of transparency in pricing and trading. Furthermore, a large share of issuers do not have a credit rating, which makes credit risk more uncertain*.

This Staff Memo was written by Stephan Wollert at the Riksbank’s Financial Stability Department.

* This sentence has been clarified in an update made on 15 October 2020. 

Staff Memo

A Staff Memo is a publication in which Riksbank staff can publish advanced analyses of relevant issues. It is a staff publication free of policy conclusions and personal standpoints in current policy issues.

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Updated 08/10/2020