An increasing number of European investors searching for yield within the fixed income space are gradually heading towards the Nordic fixed income market. The Nordic bond market is quite different from both the European and American markets. With negative interest rates in EUR (10-year bund yield below zero entering 2020), an investor looking for exposure within the European high yield market can typically expect to get a running yield of 3-5%*. In the investment grade space, the yield is usually in the range 1-2%*.
There are some key factors which make the Nordic region an attractive credit investment area which are discussed below.
Stable region for investors
The Nordic economies are widely regarded as politically stable and have solid macroeconomic fundamentals. These factors make investing less risky compared to investments in other economies with less stable governments. For example, the unemployment rate is quite low compared to EU countries.
Well diversified market with attractive yields
In 2019, after years of Norwegian volume outpacing the other Nordic countries, issued volume were equally dominated by Swedish and Norwegian issuers and with Finland and Denmark coming in 3rd and 4th. The growing market and number of non-Norwegian issuers has transferred the market to a truly diversified Nordic market, and thus with far less oil price sensitivity.
Transparent and standardized market place in terms of bond documentation and restructuring processes
Companies listed on the stock exchanges in the Nordic countries are generally transparent and are under strong regulation. This benefits investors because the requirements for these companies are to provide timely, reliable and accurate information. The governments in the Nordic countries have strict supervision of the financial markets in each country. This offers clients safe and regulated investment opportunities. When it comes to bond issues, Nordic Trustee provides bond trustee services to investors in bonds in Norway, Sweden, Denmark and Finland.
Low sensitivity to interest rate increases
The high proportion of bonds that have floating rate notes (FRN) makes the Nordic High yield market less sensitive to potentially increasing interest rates in the Nordic region. Similar bonds issued in Europe and the US, are typically is issued with a fixed rate.
Attractive credit premiums and return at lower volatility than the equity market
Global B + Bonds now have a credit spread of around 340 basis points above the risk-free rate. As illustrated by the graph below the equivalent figures for Norwegian B + bonds are close to 620 basis points above the money market rate (3 Month NIBOR). In other words, you get around 2.8% more yield for the same credit risk in Norwegian vs. global bonds. Since 2014 the credit spread has been higher than European and American high yield bonds. A relatively smaller market and smaller issuer size are the main reasons for the higher credit spreads in Nordic high yield bonds.
SB1M “Crossover replica” is based on a subset of the total Norwegian high yield universe – 39 bonds chosen to, as closely as possible, replicate the credit quality and duration of the iTraxx Crossover (both series rolled semi-annually), while at the same time reflecting the characteristics of the Norwegian market.
The case for Norwegian kroner (NOK)
The weakness in NOK against EUR and USD has been substantial over the last years. Especially in 2019, economists have been surprised by the weakness when considering traditional drivers like the positive carry (vs EUR), increased oil price, good GDP development and low unemployment.
We believe there is potential for stronger NOK in 2020 based on the following factors:
- The Norwegian Central bank to keep deposit rate at current level (1,50 %) or somewhat higher.
- Labor market expected to remain stable at current low unemployment level.
- Oil price – most estimates are in the range 60 - 75 USD.
This creates an opportunity to take on unhedged Nordic high yield exposure, investment grade exposure (or a combination) with a significant positive carry as compensation against the risk of a weaker NOK. Currently, the spread between 3-month EURIBOR and 3-month NIBOR is around 2,20 %.
FIRST Høyrente top performer among peers from inception in 2011
- Actively managed.
- Experienced management team with strong track record.
Peer group consists of other Nordic high yield funds available in the market.
Review of 2019
The fund returned 6.23% for 2019. This is slightly above the historical average of the fund. FIRST Høyrente has returned 6.12% net annualized since inception on March 17, 2011.
The credit maturity in the portfolio is now around 2.2 years (up from 2.1 years last month). The gross effective yield in the portfolio (yield) is about 8.1% (see chart above) The net yield is then 7.25%.
It was a good year for Nordic High yield with strong equity markets and with high activity in the credit markets in the region.
Investing in the Nordic credit market (especially HY) versus abroad gives investors downside protection at present, as the credit premiums are higher here. This is partly due to the sector composition, but that is not the whole explanation. Additionally, the fact that the market share of smaller issuers is higher in the Nordics, is generally compensated for by giving the investor a higher credit premium.
Summarized at the start of 2020, we can describe our market approach as "overweight credit", but it is important to do it correctly in terms of choosing the right maturities and sectors exposure. We believe that 2020 will continue with positive momentum and continued appetite for Nordic high yield both from local and foreign investors. The “yield-pickup” is substantial and also serves as a buffer should the market experience a soft period ahead.
* This is according to a representative basket of European high yield and investment grade funds published on Morningstar.de.
Sources: IMF, Swedbank, FIRST Fondene AS, SpareBank 1 Markets AS, Macrobond
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