Swedish FX Market Working Well, Fixed Income Less So: Riksbank Survey

The latest financial markets semi-annual survey by Sweden’s central bank, Sveriges Riksbank, finds that while respondents consider conditions to have improved in the Swedish kronor FX market, in fixed income they have deteriorated from the previous survey.

The Riksbank sends out the survey to gain an overall picture of participants’ views on the Swedish financial markets – how they are working, what market activity looks like and how extensive their risk-taking is. The latest report is based upon responses between 21 September and 7 October 2021 and is based solely on participants’ responses and does not reflect Riksbank assessments.

Overall, while four out of 10 say their risk-taking is neutral, the percentage taking high risks has increased since the survey in spring 2021. There are now more respondents who describe their risk-taking as high than there are who describe it as low. Almost five out of 10 respond that risk-taking has neither increased nor decreased during the past six months.

Around eight out of 10 respondents believing that trading in the SEK is functioning “well” or “very well” – and the percentage that believes the latter is the case has increased from the previous survey.

Liquidity on both the spot and forward markets is assessed as good; fewer than one out of 10 respondents choose the alternative poor. Around half see no major change in market liquidity over the past six months.

Survey respondents are clearly engaged with electronic trading in SEK, with the percentage answering a question about their e-participation in the market with “seldom” and “never”, being 3-4%. Around 50% use e-platforms “always” and just over 40% “often”, however while the percentage of those responding “always” has risen, so to – by a fraction – has those answering “seldom” or “never”. In general, however, the survey suggests that more market participants are turning to the e-channel for their FX needs in SEK.

An area that can be built out in SEK FX markets is the use of algos, around 7% say they use algos “always” (this has doubled from the last survey), while those saying they use them “often” has fallen back to around 27% from 32%. Around 25% of respondents “seldom” use algos, this is slightly higher than the previous survey but in line with the recent average. 30% never use algos in FX, up from just over 20% in the last survey, which itself was a recent outlier – in the Autumn 2020 survey this was just above 30%.

Fixed Income Troubles

The story in fixed income markets, however, is different, with only three out of 10 believing it is functioning well – indeed around four out of ten now respond that it is functioning “poorly” or “very poorly”. The percentage responding that liquidity on the markets for government securities and covered bonds is “poor” or “very poor” has risen since spring 2021 for both types of asset.

With regard to the government bonds market, almost five out of 10 in the group market maker/dealer respond that liquidity is very poor, and a similar share of investors assess that liquidity is poor. That said, a majority still considers that liquidity in interest rate swaps is good and the Riksbank says it can be noted that a large share of the respondents have no impression of liquidity on the corporate bond market. The percentage that assesses liquidity to be good for investment grade has increased since the spring, at the same time as the share describing liquidity in high yield to be good has declined.

The Riksbank itself is cited as a key reason for the poorly functioning market, seven out of 10 believe the central bank’s asset purchases over the past six months have had a “negative” or “very negative” effect on the fixed income market.

In the overall assessment of the Riksbank’s asset purchases since March 2020, a majority (just over six out of 10) consider that its purchases have made a negative or very negative contribution, with several pointing out that the Riksbank’s asset purchases are the main reason for the market functioning poorly.