Article / 18 October 2017 at 10:00 GMT

Weekly Bond Update: Sanctions don’t deter hungry investors

Fixed income Specialist / Saxo Bank
Denmark

  • Bond investors hunting yield in riskier markets
  • Russian bonds finding international buyers
  • US rate hike giving a boost to Russian fixed income

Russian debt

Despite US/EU sanctions, bond investors are still hunting for yield 

on the streets of Moscow. Photo: Shutterstock

By Althea Spinozzi

Ever since December 2015, when the Federal Reserve raised interest rates for the first time since June 2006, investors have been looking at the bond market and worrying that corporate and government spreads would widen.  

During this period, emerging market bonds rallied substantially thanks to dovish Fed policies. Now that prices are at their apparent ceiling, everybody is waiting for the bubble to burst as a rate hike could mean that EM companies may not to be able to repay debt issued in USD. 

As everybody waits, nothing is happening, and EM companies are not defaulting due to a hawkish Fed but rather because of volatile commodity prices and political tensions.

In a world where finding value is extremely hard and a lot of issuances trade at negative yields, it isn’t difficult to believe that investors have been pushed towards considering riskier assets, riskier countries, and riskier currencies. This is why one shouldn’t be surprised that many have been looking even at government and corporate debt from sanctioned countries such as Russia where higher spreads are offered (especially if one considers local currency notes).

Following the deployment of sanctions by the US and the European Union in 2014, the Russian bond market has not been able to issue the same amount of USD debt as before, pushing companies to use the local (rouble-denominated) capital market for financing. 

Regardless, this hasn't deterred international investors from looking into Russian debt. In the corporate bond world, there have been new issuances in telecommunications, consumer staples, real estate, and much more. 

Russian Railways, for instance, tapped the market last week with a RUB 15bn offering (whose seven-year bond was oversubscribed two times). 

According to Bloomberg, 60% of the issue was bought by Russian investors but a big part of it was placed among UK investors (31%).

Limited access to the international market didn’t deter Russian companies from issuing debt to fund tenders and to extend maturities whenever they could. A good example is the bond issuance of $500 million in seven-year Novolipetsk bonds. Novolipetsk used the raised funds to buy back $317m in Eurobonds maturing in 2018 and 2019 at $1,017.5 and $1,053.75 per unit respectively.

On another note, Nostrum Oil & Gas issued $725m in new notes this past July this year, and these were mostly allocated among international investors. According to Bloomberg, 40% were allocated in the United States, 39% in the UK, and 16% in continental Europe with global asset managers, investment funds banks, pension funds, and insurance companies among the buyers. 

This shows that there is appetite for Russian risk and that as soon as sanctions are eased, Russian corporate debt will be well-received abroad. Foreign debt is of vital importance for certain issuers as a large part of their revenues are in US dollars; this is particularly true for companies in metals and mining, chemicals, and oil and gas.

Russia always seems to play the villain in Hollywood, but should investors really be scared of Russian bonds? The reality is that if you like emerging markets but are worried about higher US inflation, the Russian bond market may offer interesting solutions as it’s less correlated to US rates compared to many other geographical areas.

Why is this? The primary reason is that Russia is always actively looking for ways to be independent from the West. This is the main reason why the country's central bank looked to further increase its gold reserves after sanctions were imposed in 2014... it did not want to find itself dependent on foreign currencies such as USD. 

At the moment Russia is currently one of the world’s largest holders of bullion, making it less vulnerable to political and economic uncertainties in the US.

Another factor that plays to Russia's advantage is the growing relationship between Moscow and Beijing. Last month, CEFC China Energy bought 14.16% of Rosneft, lending credence to the idea that the relationship between two of the world’s biggest producers and consumers of energy is strengthening. 

Chinese investments mean that Russia is increasingly independent of US and European investors.

Russia 10 year yields















Russia may be rough around the edges, but it is not foolish... and investors know it. That’s why they eagerly participate whenever there is a new Russian government bond issuance, and especially if it is in USD. 

Last month’s 30-year Eurobond issue was mainly allocated to the UK and US markets. High demand compresses Russian yields, and this is why the Russian 10-year government bond yields are currently trading at 2013 levels (i.e. before the annexation of Crimea), signaling that Russia is overbought. 

Many investors think that it is about time to sell Russia, but with the US rate hike looming on the background and low yields everywhere in the developed and emerging worlds, the real question is: where else one can find value?

Red Square

Overbought or perfectly positioned? Photo: Shutterstock

Althea Spinozzi is a sales trader at Saxo Bank

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