Market situations affect investor behaviour

In the staff memo “Investor behaviour in Swedish bond markets”, author Mathias Andersson identifies, among other things, investors who exhibit countercyclical behaviour, i.e. those who buy bonds under market stress when prices are falling. Such behaviour can alleviate price falls and the funding costs for companies in strained funding environments. However, these investors do not always act countercyclically in all situations or markets.

For example, the insurance and pension sector acted countercyclically in the corporate bond market during the first quarter of the pandemic, buying corporate bonds from funds with liquidity problems, but acted procyclically in covered bonds when banks had occasional difficulties issuing such bonds. This procyclical behaviour was paused when the Riksbank started buying covered bonds and resumed when the Riksbank started letting its holdings mature, and risk premia rose again.

Markets have so far absorbed the Riksbank’s quantitative tightening measures. Long-term funds have seen large net inflows and have been buyers of Swedish bonds, and foreign investors are returning to the markets. Some of these foreign players are funds that appear to have leveraged part of their covered bond holdings. This can make banks’ market funding more volatile.

Author: Mathias Andersson, working at the Financial Stability Department.