Liquidity has never been the strongest suit for the Finnish government bond market, but it seems that European Monetary Union has made things even worse.
Kim Jansen at Carnegie Asset Management says that the onset of EMU did bring some of the bigger foreign institutions into the marketplace, but on the other hand several of the domestic market makers have pulled out and that overall liquidity is much smaller than before.
“Like other governments throughout Europe and the world, Finland is repaying its debt and the market is shrinking,” says Jansen. “The Treasury office is trying to support certain issues and make them the benchmarks. For example, they have converted the very high coupon 2004s into 2011 maturity. But liquidity is still a problem and it is worsening.”
Jansen comments that Carnegie will continue to hold Finnish government bonds as long as the liquidity remains sufficient, but that it uses Bund futures for hedging or shorting because of the excellent liquidity. “We have not moved into other government bond markets because there does not seem much point in switching out, we are still believers in our government bonds. The larger institutions have diversified out more, I believe. What we have done after EMU is to diversify into EU corporate bonds.”
Bedri Kuusito, fixed income manager with Varma-Sampo, one of Finland’s largest insurance companies, confirms that his company has indeed been moving out of the domestic government bond market and switching into other EU markets. “We have used EMU to diversify our government bond portfolios. The Finnish market has only a few benchmark bonds along the curve. By accessing the rest of Europe we can fine-tune our investment strategies much more by using the whole curve. Although we have been moving out of Finland, that should not be seen as a criticism of our market. I think the Treasury is doing a commendable job with its debt management, and with the changes it has been making to streamline the market and maintain liquidity as much as possible.”
Evli Fixed Income Securities is one of the dealers that has recently pulled out of trading Finnish government bonds. “We have merged our securities side back into the parent company and have joined the asset management division,” explains Janne Lassila, erstwhile head of Evli’s Securities company. “There were two main reasons for us pulling out. The first was, quite simply, the prospect of diminishing supply of Finnish government bonds, coupled with the rapidly shrinking turnover in the market post-EMU. When we established ourselves back in 1993 as the first non-bank primary dealers, we were seen as specialists in a specialist market. Now, within the euro-zone, Finnish economic and political fundamentals just do not really matter any more. Secondary bond market turnover increased rapidly every year until 1997/98. But take a look at some recent trading figures: customer, or secondary, trading totalled approximately E50m, which is shared across the 12 or 13 primary dealers. The second reason for withdrawing was that in the securities arm, we had built a strong team of six traders whose skills are desperately needed elsewhere in our asset management business, which is where we think we can be most productive.”
Evli Asset Management is building and developing alternative investment funds, including hedge funds. It has also started building credit research capabilities and is now running a corporate bond fund investing in high-yield bonds within Europe.
Evli is not alone in pulling out. Den Danske Bank has recently stopped making markets, as has Leonia, one of Finland’s bigger financial groups. Although the reasons for pulling out of a highly competitive and rapidly shrinking market seem very compelling and it is ironic that some international fund managers are eyeing up Finnish government bonds.
Geoff Lunt, European fund manager at Investec, comments, “Although it is not a market we have invested in for several years, we think Finland could be very interesting in the short term and could outperform Bunds and other Europeans soon. We have seen Swedish government bonds have a great run, moving from 35 over to 20 through Bunds. And it has all been down to the government’s sale of the national telecom company Telia and its intent to use the proceeds to pay off its debt. Recent statements from the Swedish government suggest that the debt repayment schedule will be quicker and more expansive than had been expected by the market, hence the strength in Swedish government bonds. If the Finnish government sells off its telecom arm, then that could raise about FIM200bn – which would go straight to the government and could repay more debt. We have already seen the spread of Finnish_bonds versus Bunds come in to about 18 basis points and I think a positive surprise could take them flat to Bunds.” Caroline Hay