If we hold the bond until it has matured, we know exactly how many Swedish kronor the Riksbank will receive in interest on it. And we also know how much it cost to buy. But we don’t know what the funding cost for the bonds will be. Because the cost depends on how the repo rate develops up until the bond matures. This maturity transformation is actually quite similar to operations pursued by commercial banks to make a profit, i.e. holding long-term assets funded by short-term borrowing. And even if such operations are associated with an interest-rate risk which makes for an uncertain return, one can normally count on making a profit more often than making a loss. This is because short-term rates (such as the repo rate that has a one-week maturity) are usually on average slightly lower than long-term rates (e.g. the rate for five-year government bonds). In economics jargon, this is referred to as term premiums on the financial markets normally being positive. In practice, however, it is very difficult to determine how large these term premiums are at any one particular time. The premiums cannot be directly observed on the financial markets but must either be estimated based on a forecast for future shortterm rates or estimated using statistical methods based on historical connections between interest rates at various maturities and different asset-types. 7 The ECB’s (2012) interpretation of this is that central banks should avoid prolonged periods with negative  equity.
The bonds have so far increased in value but there is every indication that they will lead to a loss in the future, and hence contribute to a period of lower or zero dividends to the government. 2 Today, I would like to outline how the bond purchases have created these interest-rate risks and how future interest-rate developments will affect the Riksbank’s profits and dividends.   Thanks to Carl-Johan Belfrage, who has helped me write the text, and to Jan Alsterlind, Heidi Elmér, Henrik Erikson, Rickard Eriksson, Ola Melander, Marianne Sterner, Ulf Söderström and Anders Vredin, who have contributed valuable comments and observations. 1 See af Jochnick (2015). 2 Another change is that the Riksbank has built up a larger foreign exchange reserve. This larger reserve does not, however, involve any actual increase in the currency or interest-rate risks as it is funded by foreign exchange loans with approximately the same maturities as the new assets. But the larger foreign exchange reserve will still lead to the Riksbank’s reported profit being more sensitive to interest rates. This is because the Riksbank’s assets but not its liabilities are reported at market value. The lower interest rates have therefore improved the Riksbank’s reported profit via value increases in the foreign exchange reserve, but will contribute to lower reported profit a few years ahead. 1 [12]  Chart 1.