Finland regions

Russian threat deters Baltic and Finnish bond investors

Russia’s invasion of Ukraine has jittered bond markets in the Baltics and Finland, and discouraged international investment in the region as fund managers seek to avoid geopolitical risks.

Debt investors are turning away from Finland, Lithuania, Latvia and Estonia, and are showing a preference for other markets further from the Russian border, said André Küüsvek, managing director of Nordic Investment. Bank, which is supported by the governments of the region.

“The larger bond funds – more the global funds – say it’s very difficult for them to assess the extent of the risk,” Küüsvek said. “It’s easier to adopt a ‘wait and see’ attitude.”

Appetite for NIB funding began to grow before the war in Ukraine in response to rising inflation and higher central bank rates, and increased in 2022, Küüsvek said.

The NIB granted 1.2 billion euros in loans in the first quarter of 2022, almost five times the amount in the same period of 2021, and an increase of more than 25% compared to the previous quarter, the bulk of its financing being intended for businesses. .

“It was a combination of high inflation and rate hikes and geopolitical uncertainties that mainly affected [new bond issues] in the Baltic countries and in Finland,” Küüsvek added.

The yield spread between the region’s government bonds and corporate-issued debt has widened recently, reflecting greater nervousness.

In government debt markets, the yield on Finland’s benchmark 10-year bond has risen about 0.8 percentage points since Feb. 24 to 1.4%, according to Tradeweb data. The bond’s spread, or degree of risk, over the benchmark German 10-year bond in Europe widened from 0.36 percentage point to 0.46 percentage point over the same period.

Nicolas Forest, global head of fixed income at asset manager Candriam, said he had downgraded countries and divested, looking instead to other southern European countries where returns are similar but geopolitical risks are lower.

“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 level of return similar in a larger country? Forest said.

Bond investors’ concerns extend elsewhere in Eastern Europe, said Tatjana Greil Castro, co-head of public markets at Muzinich, an investment firm specializing in credit.

“All of these companies operating from Romania, Bulgaria and Central and Eastern Europe have suffered from proximity and potential fallout,” she said.

The challenging overall picture for bond investors, with yields hitting 20-year lows in European corporate credit markets and the long bull run in the government bond market nearing its end, also contributed to the negative sentiment among traders, Greil Castro said. “If you are in a negative mental state, you see risk and drama everywhere and the [spilling over of the war] is easy to concentrate.

The weak liquidity of Baltic state bonds should be further affected by the European Central Bank’s plans to phase out bond purchases in the coming months, said Anton Hauser, fund manager at the asset manager. Austrian Erste AM, which manages $76 billion and focuses on Central and Eastern Europe.

Although he said some investors sold Baltic government bonds due to geopolitical concerns, “most of the bonds are in the portfolios of locals who know the situation well. There is no big problem with sales.

The challenge is one of international investors’ perception rather than reality, Küüsvek added. “If anything, security is actually better than it was in January because reality has kicked in and preparedness and awareness are much better.