2. MONEY MARKET
Money market is a component of the financial market for
assets involved in short term borrowing, lending, buying
and selling with maturities of one year or less.
As regards Sweden, the money market is regarded as a
part of the fixed-income market. The bond market
comprises trade in securities –bonds – generally with
maturities of one year and longer. Trading on the money
market comprises, for example, treasury bills and
certificates, usually with maturities of up to one year.
The participants are largely the same on these two
markets, primarily central governments, mortgage
institutions, banks and large investors such as insurance
companies and pension funds
3. PURPOSES OF MONEY MARKET
Bond Market: the main purpose of the bond market is to
channel long-term savings from certain participants to
others in need of capital.
Money Market: The most important function of the
money market is instead to facilitate the investment of
surpluses and to mediate short-term funding. In the
most short-term segment of the money market
(maturities ranging from one day to one week), the
instruments are used to carry out daily adjustments of
deficits and surpluses in the transaction accounts of the
market participants. A large part of the turnover takes
place in this segment.
4. SPECIFIC MONEY MARKET INSTRUMENTS
Treasury Bills: is a debt instrument that represents a
short-term claim on the state that can be bought and sold
on the money market. Treasury bills are issued by the
Swedish National Debt Office and are used, among other
things, to manage fluctuations in the government’s short-
term borrowing requirement.
Issued through the Swedish National Debt Office issue
framework via tender offers. Bids are submitted to
dealers authorised by the Swedish National Debt
Office, i.e. banks and securities institutions. Bids at the
lowest rate of interest are accepted first
5. SPECIFIC MONEY MARKET INSTRUMENTS
Treasury bills’ previous dominant position on the money
market has successively declined. At the end of 2011, treasury
bills accounted for slightly less than 30 per cent of the
outstanding stock of short-term securities.
Certificate: same kind of debt instrument as a treasury bill but
is issued by banks and companies. The primary aim of the
mortgage institutions’ short-term borrowing is to match their
lending to their customers and thus manage their interest rate
risks.
The short-term borrowing of the mortgage institutions via
certificates issued in Swedish kronor amounted to SEK 9
billion at year-end 2011. The banks’ short-term borrowing in
certificates issued in Swedish kronor increased during 2011 to
SEK 48 billion, the borrowing of the non-financial companies
amounted to SEK 68 billion at year-end 2011.
6. SPECIFIC MONEY MARKET INSTRUMENTS
Deposit contracts and Repos: used when maturities in
the money market are a week or less. These standardised
contracts offer the participants greater flexibility in
borrowing or investing at the shortest periods of
maturity.
Repos: A repo is an agreement in which one party agrees
to sell a security to another party in return for liquid
funds. Conversely, repos may be viewed as security loans
collateralised with cash. A company that wants to obtain
liquidity via repos must have a portfolio of securities on
which it can raise loans. Almost all the turnover in repos
is in repos with maturities of up to one week.
7. MONEY MARKET INSTRUMENTS (Contd.)
Deposit Contracts: are standardised deposit and
lending agreements without requirements for
underlying collateral used for depositing and lending
purposes less than a week’s time. Deposits are
preferred to be used to even out the need for liquidity
between the banks overnight. The banks agree to
assist each other with liquidity and, under normal
conditions, to pay the overnight rate for this, which
is usually the same as the Riksbank’s repo rate plus a
supplement.
8. INVESTORS IN MONEY MARKET
The central government, the mortgage institutions and the banks
are the largest borrowers on the money market. Central government
borrowing on the money market takes place through treasury bills.
Other institutions borrow by issuing certificates such as bank
certificates and mortgage certificates.
Swedish banks, insurance companies and funds form the largest
categories of investors in the money market. The category
companies, funds and others together has the largest holdings on
the money market and control almost half of the outstanding stock.
banks’ holdings of short-term fixed income securities constituted
about one quarter of the total money market at year-end 2011, while
the insurance companies’ holdings corresponded to about 12 per
cent of the market.
Foreign investors accounted for about 16 per cent of the market’s
total volume at year-end 2011.
9. RECENT TRENDS
The total stock of money market instruments issued has
decreased significantly in recent years. Compared with
2009, the stock has decreased by almost SEK 290 billion.
The substantial fall in the total stock in recent years is partly
due to the increase in borrowing in money market
instruments denominated in foreign currencies, which has
replaced parts of borrowing in Swedish kronor.
The government’s issue of treasury bills has also declined in
pace with the fall in the government’s borrowing requirement.
Borrowing at longer maturities through bonds has been given
priority ahead of the issue of treasury bills.
Banks and mortgage institutions have also issued a greater
proportion of long-term securities than previously, at the
expense of borrowing over the shorter term.
