The Swedish budget for next year has a 42 billion kronor ($5 billion) hole. The Swedish National Debt Office needs to explain this situation.
From the government’s answer depends whether the country’s central bank will be able to extend its quantitative easing program into other types of bonds in 2017. However, according to Danske Bank, the regulator could buy covered bonds, thus creating a risk of a considerable squeeze in the Swedish bond market.
The central bank is implementing a program of quantitative easing in order to cause inflation, but by year end it will own about 40% of the government bond market. Expanding bond buying will depend on new bond issuance.
It is highly likely that the Swedish National Debt Office will slash its forecast for bond issuance to about 60 billion kronor from 77 billion kronor, according to experts.
Currently, the Riksbank is discussing with the agency potential market consequences of this large-scale bond buying program. Moreover, the Riksbank does not rule out the possibility of buying other asset types like covered bonds, corporate or municipal bonds in case it needs to make policy more expansionary.
According to Danske Bank, officials will announce a one-year extension of its government bond purchases worth 30 billion kronor in the first half of the year, compared with 45 billion kronor in the second half of 2016.
Despite the forecast, government bond extension into the covered bond market could drive down mortgage yields further, thus inflating the Swedish housing bubble.
