Analysts at SEB expect a “supply shock” in Swedish covered bonds in 2010-2011 to ease as a wave of issuance to refinance government guaranteed (GG) funding ends, and issuers have said that they, too, expect volumes to decline, with other factors contributing to a slower pace of issuance.

SEB said in research on Thursday that Swedish issuers have issued about Skr500bn (Eu55.3bn) gross of covered bonds this year, compared with Skr700bn in 2010 (Eu77.5bn), according to SEB, but that they expect supply to continue to fall, to around Skr400bn, in coming years.

Charlotte Asgermyr, analyst at SEB, attributed stronger supply in 2010 and 2011 to stronger growth in covered bond issuance rather than in lending, resulting from temporary effects such as banks replacing senior commercial paper with covered bonds and pre-financing of redeeming government guaranteed bonds by covered bonds.

SEB long term estimated gross supply outlook for Swedish covered bonds

“These are temporary effects, really,” Asgermyr told The Covered Bond Report, “so I expect gross supply of Swedish covered bonds to come down in the coming years.

“However, 2011 will likely still have been affected by prefunding of redeeming government bonds by covered bonds; we estimate a gross supply of Swedish covered bonds for 2011 of Skr500bn-Skr550bn (Eu55.3bn-Eu61bn).”

Swedbank Hypotek said in a third quarter results release last Tuesday (25 October) that it has issued Skr210bn of long term debt this year versus Skr180bn of long term redemptions for the whole of this year (see tables, right, for further details).

“During the next three quarters long term funding with a nominal value of Skr157bn will mature, of which Skr80bn relates to funding through the government guarantee programme,” said the bank. “To offset the refinancing risk during this period, the bank has increased its liquidity reserves.

“After June 2012 annual refinancing needs will decline significantly to an average nominal amount of about Skr120bn, compared with an average nominal issuance volume of approximately Skr280bn per year in the last two years.”

Per Tunestam, treasurer at SBAB (parent of the Swedish Covered Bond Corporation), said that Swedbank was unique in its use of government guaranteed bonds compared with other banks.

“We also used the programme, but in a very small way,” he said. “Our last guaranteed bonds will mature in Q1 next year and we will replace them with a mixture of covered bonds and senior unsecured.

“But again, it is not a large amount. We’re not going to see large amounts going into covered bonds,” he added.

He said a fall in growth of covered bond supply in Sweden was to be expected given a slower pace in lending as well as an introduction of an LTV cap of 85% by the Swedish FSA in October of last year “which probably had a dampening on mortgage lending overall”.

Tunestam also said that issuers who had switched into covered bonds are probably now approaching a saturation point.

“Many issuers have also opted to issue more longer dated covered bonds than previously,” he said, “partly as a result of new funding requirements coming from new regulations.”

However, Olof Manner, head of Scandinavian rates sales at Royal Bank of Scotland, said he expects redemptions to lead to elevated covered bond supply in 2012, which will continue to rise in forthcoming years.

“For starters, you have these huge redemptions, which are going to help grow the covered bond supply,” he said.