Russia’s invasion of Ukraine has despatched jitters by way of bond markets within the Baltics and Finland, and deterred worldwide funding within the area, as fund managers search to keep away from geopolitical dangers.
Debt traders are shying away from Finland, Lithuania, Latvia and Estonia, and displaying a desire for different markets farther from the Russian border, mentioned André Küüsvek, chief govt of the Nordic Investment Bank, which is backed by governments within the area.
“Larger bond funds — the more global funds — say it’s very difficult for them to assess how big the risk is,” Küüsvek mentioned. “It’s easier to take a ‘wait and see’ attitude.”
Appetite for NIB financing began to develop earlier than the warfare in Ukraine in response to larger inflation and price rises from central banks, and has elevated in 2022, Küüsvek mentioned.
The NIB agreed €1.2bn in loans within the first quarter of 2022, nearly 5 occasions the quantity in the identical interval of 2021, and a rise of greater than 25 per cent on the earlier quarter, with the majority of its financing geared toward corporations.
“It’s a combination of high inflation and rate hikes and the geopolitical uncertainties that have mostly affected [new bond issues] in the Baltics and Finland”, Küüsvek added.
The hole in yields between the area’s authorities bonds and the debt issued by corporations has widened of late, reflecting a larger sense of nervousness.
In authorities debt markets, the yield on Finland’s benchmark 10-year bond has risen by round 0.8 share factors since February 24 to 1.4 per cent, in response to Tradeweb information. The unfold, or riskiness of the bond relative to Europe’s benchmark 10-year German bond, has widened from 0.36 share factors to 0.46 share factors over the identical interval.
Nicolas Forest, international head of mounted earnings at asset supervisor Candriam, mentioned he had downgraded the international locations and disinvested, flipping as an alternative to different international locations in southern Europe the place yields are comparable however geopolitical dangers are decrease.
“If I look at Latvia and Lithuania compared to Spain, does it make sense to invest in a very small country, dependent on Russian oil, when there is an alternative with a similar level of yield in a bigger country?” Forest mentioned.
Concerns for bond traders prolong to elsewhere in japanese Europe, mentioned Tatjana Greil Castro, co-head of public markets at Muzinich, an funding agency specialising in credit score.
“All those companies that operate out of Romania, Bulgaria and central and eastern Europe have been suffering from the closeness and the potential spillover,” she mentioned.
The troublesome wider image for bond traders, with returns reaching 20-year lows throughout European company credit score markets and the long-running authorities bond market bull run coming to an finish, have additionally contributed to destructive sentiment amongst merchants, Greil Castro mentioned. “If you’re in a negative mental state, you see risks and drama everywhere and the [spilling over of the war] is an easy one to focus on.”
Low liquidity in Baltic state bonds is prone to be additional hit by plans from the European Central Bank to section out bond shopping for within the months forward, mentioned Anton Hauser, a fund supervisor at Austrian asset supervisor Erste AM, which manages $76bn and focuses on central and japanese Europe.
Although he mentioned some traders had offered Baltic state bonds due to geopolitical worries, “most bonds are sitting in portfolios of locals who know the situation well. There’s no big problem with sell-offs.”
The problem is one in every of notion from worldwide traders slightly than actuality, Küüsvek added. “If anything, security is actually better than it was in January because the reality has kicked in and the readiness and awareness is much greater.”