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Best of BRICs Bond Rally in Euroclear Countdown: Russia Credit

November 29, 2012

Banks preparing for the opening of Russia’s bond market to foreigners are loading up on ruble debt, driving yields to the lowest on record and spurring the best monthly gains among the largest emerging markets.

The Treasury sold 13.5 billion rubles ($434 million) of so- called OFZ bonds due April 2017 yesterday at an average yield of 6.8 percent, the bottom of its guidance and the lowest rate at any of its 10 previous auctions of the debt, central bank data show. Ruble bonds have returned 1.5 percent this month, beating Brazil, China and India, JPMorgan Chase & Co. indexes show.

President Vladimir Putin’s government is opening the local market to Euroclear Bank SA and Clearstream International SA, the world’s biggest settlement systems, to turn the country into a financial hub. A “considerable” portion of funds invested in OFZs comes from foreigners, and greater access will cut the government’s borrowing costs, Finance Minister Anton Siluanov told a conference in Moscow yesterday.

“October and November have obviously been the best period for OFZs,” Dmitry Dudkin, head of fixed-income analysis, at UralSib Financial Corp. in Moscow, said by e-mail. “Market sentiment remains strong ahead of Euroclear settlement. This will persist exactly until it actually starts.”

Goldman Sachs Group Inc. predicted in September that the changes will generate inflows of as much as $30 billion by mid-2013. Demand at the top end of the government’s yield guidance of 6.8 percent to 6.85 percent was almost double the 15 billion rubles offered at yesterday’s sale, the Finance Ministry said on its website.

Start Operations

Euroclear is still aiming to start operations with OFZ bonds by year-end, Stephan Pouyat, head of product management global reach, said by e-mail yesterday. Foreign investors, who can now trade via a brokerage account in the country, will be able to settle directly over Euroclear’s international platform.

“If foreign companies have more access to our state debt market then this will help us lower our borrowing costs further,” finance chief Siluanov said at the conference yesterday.

The return on ruble bonds compares with a 0.8 percent gain for Indian debt, a 0.4 percent increase for Chinese bonds and a 0.6 percent decline for Brazil’s, according to JPMorgan indexes.

The yield on the April 2017 notes slid seven basis points to 6.82 percent, the lowest on record, in trading yesterday. The rate has dropped 27 basis points this month, following a 42 basis-point decline in October.

‘Aggressive’ pricing

“The pricing was pretty aggressive,” Dmitry Gritskevich, an analyst with Moscow-based OAO Promsvyazbank, said by e-mail yesterday. “It’s a reflection of the fact that the Finance Ministry doesn’t need to borrow, given this year’s deficit-free budget.”

Russia will run a surplus equivalent to 0.1 percent to 0.2 percent of gross domestic product this year, Interfax cited First Deputy Finance Minister Tatiana Nesterenko as saying Nov. 17. The budget, approved yesterday by Russia’s upper house of parliament, predicts a shortfall of 0.8 percent of GDP next year and 0.2 percent in 2014.

“We expected and were betting on a rally in domestic bonds,” Vladimir Potapov, global head of portfolio management at VTB Capital Asset Management, said in an interview in Moscow on Nov. 28. “The main thing is that there aren’t any more delays in the Euroclear launch.”

Ruble, Bonds

The ruble added 0.4 percent to 31.0599 per dollar by 10:26 a.m. in Moscow. Non-deliverable forwards, which provide a guide to expectations of currency movements, showed the ruble at 31.5085 per dollar in three months.

Russia’s dollar bonds due in April 2020 were little changed, leaving the yield steady at 2.517 percent. The yield on Russia’s international ruble bond due in March 2018 was unchanged yesterday at 5.987 percent.

Russia is rated BBB by Fitch Ratings, the second-lowest investment-grade ranking. The extra yield investors demand to hold Russian government dollar bonds rather than U.S. Treasuries fell two basis points to 193, according to JPMorgan Chase & Co. indexes. The difference compares with 166 basis points for debt of similarly rated Mexico and 150 basis points for Brazil.

‘Any Price’

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was steady at 145 according to data compiled by Bloomberg. The default swaps cost seven basis points more than Turkey, which is rated one level lower at BBB- by Fitch. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Two so-called non-competitive deals yesterday accounted for about 10 billion rubles of the bonds bought, a sign foreign investors are acquiring the notes, according to Anton Nikitin, an analyst with Moscow-based VTB Capital.

“The people who really want to buy papers at any price, they just put in the bids for a certain volume and receive this volume at the weighted average price,” he said by e-mail.

“The rally is fully related to expectations that Euroclear is coming.”

To contact the reporter on this story: Lyubov Pronina in London at

To contact the editor responsible for this story: Gavin Serkin at

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