Article / 14 January 2015 at 10:27 GMT

Weekly Bond Update: Russia on the ropes

Fixed Income trader / Saxo Bank
Denmark
  • Russia could face further credit downgrades
  • Ruble heading back toward December panic lows
  • Russian bonds already trading at sub-investment grade levels

By Michael Boye

After a prolonged period of stability, turmoil surrounding the Russian economy has flared up again since the new year. The ruble is slowly heading back towards panic levels from December and CDS spreads are already trading back to new highs at 600 basis points.
 

Russia
Source: Bloomberg

Shortly before the weekend, Fitch downgraded Russia's credit rating to BBB-, a move that was largely expected by financial markets. Thus, Russia still holds investment grade credit ratings from all of the three major credit rating agencies. 

This may, however, be about to change later this month when S&P will publish its credit update. Its latest update (a credit downgrade with negative outlook) dates back to April, and it is fair to say that the economic and political situation in Russia has deteriorated markedly since then. Given this background, a downgrade to high yield status seems likely. 

The effect, on the other hand, is likely to be limited as most forced investment grade investors could be expected to have traded out of the country by now. In addition, Russian bonds are already being traded at levels indicating creditworthiness far below the investment grade level.

Moscow

Storm clouds over the Moscow financial district; the past months have seen the Russian currency and economy tank on sanctions and collapsing oil prices. Photo: iStock

The benchmark 10-year government bond in US dollars maturing in 2023, for example, is trading around 85 with a yield of 7.2%. The bond was traded at 82 in December and subsequently increased to a price of 90 before the new year.

Corporate bonds are also trading slightly weaker lately. Gazprom (in USD and maturing in 2022) is now trading at a price of around 86.50 with a yield of 9.5%, and is thus close to the December low of 82. 

Sberbank subordinated bonds in US dollars maturing in 2022 are trading around 69 with an effective yield of 11%, while the subordinated perpetual bond with first call in 2019 from VTB Bank (another large and also partially state-owned bank) is trading around 63. This corresponds to an effective yield of more than 18%.

-- Edited by Michael McKenna

Michael Boye is a fixed income trader at Saxo Bank – the home of social trading

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