Norway Boasts World's Safest Bonds

(April 13, 2011) — The International Monetary Fund (IMF) has revealed that only a small group of countries house the world’s safest bonds.

Australia and New Zealand, as well as the countries of Scandinavia — Denmark, Finland, Sweden and Norway — are some of the most financially-sound regions in the world, according to the IMF. With relatively small liabilities, their pension funds are some of the best-funded globally.

The country with the premier finances and most attractive bonds: Norway. According to the International Monetary Fund, Norway’s public savings exceed public debts by 160% of gross domestic product. The county’s $512 billion Government Pension Fund Global, the second-largest sovereign wealth fund in the world, deserves a large amount of credit for the country’s stellar finances.

“Norway’s biggest benefit is that it has a huge amount of oil, owned for the public,” Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia, tells aiCIO. “Because of all the oil revenues, Norway’s revenue to expense ratio is very attractive compared to other countries, and it is one of the most well-financed countries in the world,” he says. “Many of the Scandinavian countries have been fiscally prudent, with their cultural values speaking for the equal distribution of wealth through high taxation and a high level of government services.”

LeBas indicates that currency risk is a main investment criteria analyzed when looking at global bonds. “If you’re a US pension fund paying pensions in dollars, you want to avoid over-allocating to foreign currencies to mitigate your foreign-exchange risk,” he says, explaining the tendency for domestic investors to buy domestic bonds.

Since the financial crisis, institutional investors have been increasingly flocking toward bonds to avoid the volatility of global equities. “There’s been a trend toward simplicity in last couple years, with more demand for high quality assets, such as corporate bonds, Treasury bonds, and bonds issued by US agencies such as Fannie Mae and Freddie Mac,” LeBas tells aiCIO. “I think that trend is here to stay. One of the lessons of the financial crisis is that risk will come back to bite. The question is when, not if.”