Sweden's Riksbank staff analysis finds quantitative tightening has had limited effects so far as banks and hedge funds absorbed bond supply

Sweden's Riksbank has published an Economic Commentary by Erik Andersson and Peter Kaplan concluding that the central bank's quantitative tightening since 2022 has so far had limited effects on bank deposits and bond risk premia. The authors argue that much of the reduction in the Riksbank's bond holdings has been absorbed by banks and leveraged investors such as hedge funds, often financed through bank lending and repo transactions, which has kept deposits stable and muted the expected tightening in financial conditions. The analysis focuses mainly on covered bonds. Banks have bought bonds to replace shrinking central bank liquidity in their liquid asset buffers, while foreign leveraged investors had by the end of 2025 bought roughly the same volume of covered bonds as the Riksbank had reduced. More broadly, changes in banks' bond holdings and reverse repos have largely matched the fall in the Riksbank's bond portfolio, and covered bond spreads against swaps have stayed stable or fallen, indicating little pressure on banks to replace deposits with more expensive wholesale funding. The commentary says the impact of quantitative tightening could become stronger if hedge funds' funding weakens. Since the second half of 2024, foreign investors have faced higher covered bond repo rates than Swedish counterparties, and the gap became significant in 2025. Some Riksbank bond holdings still remain to mature or be sold, and if leveraged investors can no longer absorb that supply, other investors may demand higher returns, pushing up risk premia and reducing bank deposits.