Swedish government bonds are set to gain further next year as investors look for a safe haven for their cash and the country's central bank lowers rates further to help a slowing economy.

Investors have piled into Swedish assets recently, pushing government debt yields to record lows and helping the currency hold near 10-year highs against the euro despite a historic tendency to weaken during periods of economic turmoil.

Foreigners' holdings of Swedish government debt were 386 billion crowns (35 billion pounds) in October 2011, having risen steadily over the last three years from 245 billion in the same month in 2008, according to statistics office data.

Strong government finances - in contrast to most of Europe -

are limiting debt issuance and, together with the expectation of easier monetary policy, will support prices over the coming year.

Sweden's AAA status is extremely secure and we think the debt dynamics of Sweden look very positive, said Jack Kelly, fixed income fund manager at Standard Life Investments, which has about $243 billion under management.

There is still a relative scarcity of Swedish government debt ... and in the grand scheme of things there is going to be continued global demand for a AAA country such as Sweden.

Other European AAA countries, such as France, are in danger of being downgraded as the euro zone debt crisis bites.

Kelly said Standard Life had been overweight Swedish debt in its global bond and European debt portfolios for several months.

Ten-year Swedish debt was yielding 1.67 percent on Tuesday, a premium to usually gold-standard German paper yielding around 1.92 percent.

Yields on five-year Swedish debt dropped to their lowest ever in an auction this month, falling to 1.023 percent from 3.123 percent in April.

Sweden's 25 point interest rate cut on Tuesday did not drag yields down, however, because the central Riksbank made only a small downward revision to its forecast for rates next year.

But many expect Sweden will cut rates further.

The basic view is that it (Swedish debt) still performs going forward next year, said Peter Goves, interest rate analyst at Citigroup. You can probably shave off another 10-20 bps from the 10 year rate ... but it (the market) is already pricing in quite loose monetary policy.

The Riksbank forecasts its repo rate averaging 1.7 percent through next year, before rising.

They are reluctant cutters and they will keep lowering the repo rate next year, it's just a question of time, said Par Magnusson, economist at RBS.

FEW RISKS

Unlike most of Europe, where recriminations about irresponsible fiscal policy are the order of the day, Sweden's prudence and strong finances have been widely praised.

After a sharp recession in 2009, the government has restored a balanced budget and debt levels are expected to drop to below 30 percent of output in the coming few years.

While Sweden mulls how to keep debt market liquidity amid low issuance, much of Europe has debt more than 100 percent of GDP and faces downgrades.

A large number of actors who we haven't seen before are buying Swedish government paper, Financial Markets Minister Peter Norman told parliament recently.

Even a darker outlook for Sweden, with growth set to grind to a halt next year, has not affected sentiment on Swedish debt.

People are not going to question Swedish creditworthiness, even if we get worse growth in 2012, said Martin Tallroth, rate strategist at Swedbank.

The state budget watchdog sees the government running a tiny budget surplus next year, though, including the pension system and local government, public finances are expected to show a slight shortfall in 2012.

This means the government has room for extra spending.

Sweden has the fiscal tools available if it needs to stimulate (the economy). It's an option that is not available to all countries in this environment, said Standard Life's Kelly.

The chance of such fiscal stimulation meant Christian Borjesson, rate strategist at Nordea, preferred the short end of the yield curve as new issuance would probably come in longer-dated debt.

If you are forced to buy bonds somewhere in the world, then I think most people ... are more interested in putting their money somewhere they are sure of getting it back, he said.

Sweden is absolutely a safe haven compared with many other countries.

(Editing by Jeremy Gaunt.)