First Half of 2025: Strong Returns in the Nordic Bond Market

DNB Fund Nordic Investment Grade has had a decent performance over the last few years. The combination of relatively short duration (the fund has had a duration of around 0.8 years) and somewhat longer credit duration, typically in the 3.5-4 year range, has created a combination of attractive return and relatively low volatility.

The portfolio structure is for a large part achieved through investments in floating rate notes, i.e. corporate bonds with a fixed credit spread but where the base rate (Nibor, Stibor etc.) is reset every three months, keeping interest rate risk low.

When comparing return to shorter duration European indices, both corporate and covered/government the risk return characteristics of the Nordic Investment Grade Fund look quite attractive.

High activity in the Issuance Market

The Nordic Investment Grade market has been quite active in the first half of 2025. Issuance volumes have been quite high. For non-financial corporates the first half of 2025 have been close to record high, whereas new issuance for financial bonds has been closer to average over the past few years.

Liquidity in the secondary market has overall been strong. Particularly, we experience the liquidity in the Norwegian market as quite strong also in periods where volatility in credit spread increases.

Credit Spreads back to the levels at the start of 2025

Looking at credit spreads in the first half of 2025 we observe that spreads has not changed much since the start of the year. The year started strong with credit spread tightening before spreads widened in early April on the basis of the initial planned tariff regime from the US. Pullback and renewed negotiations over tariff calmed markets and during Q2 we have seen a tightening of credit spreads more or less back to the levels at the start of 2025.

From present spread levels we deem the outlook for excess return from the credit element of the portfolio to be quite decent. The carry and roll down from absolute credit spread levels and steepness of credit curves are likely to continue to contribute to attractive returns over the next 6-12 months. We could clearly see periods of elevated volatility in credit spreads given continued uncertainty concerning US tariffs but our view is that companies’ balance sheets are quite healthy and that the lack of major imbalances in the Nordic economies is likely to render such periods quite short-lived.

Stable duration

Given the relatively short duration of the Nordic Investment Grade Fund interest rate movements will not be the most important driver for return in this fund. Most of the Nordic central banks have followed the ECB quite close in the rate cutting cycle (Finland has the Euro and DKK is pegged to the Euro). The outlier has been Norway where we saw the first rate cut in June this year. We expect the Swedish central bank to cut (at least) once more and the Norwegian central bank to cut two times before year end. Central bank policies in the Nordic could have implications for exchange rates but all fx-risk in the fund is fully hedged so any volatility in this dimension would not impact the fund.

A fund for Conservative IG-investors

This fund could be suitable for relatively conservative Investment Grade investors or investors looking to enhance money market returns and accepting a somewhat higher volatility in exchange for higher expected returns.