By Emma O’Brien and Denis Maternovsky - Sep 15, 2010 4:32 PM GMT+0800
Russia is offering the largest yield premium on federal bonds in almost two months to lure investors concerned inflation will quicken and to finance its budget gap.
The Finance Ministry will auction 35 billion rubles ($1.1 billion) of federal bonds, known as OFZs, due in July 2015 priced to yield as much as 7.30 percent today, according to a statement yesterday. The 9 basis point premium over the 7.21 percent market yield on OFZs due July 15, 2015 is the most since the government sold notes due June 2011 at 11 basis points higher than the market rate on July 28, central bank data show.
While investors are showing increasing appetite for government debt from the U.S. to India, Prime Minister Vladimir Putin’s government has failed to sell most of the OFZs due in three years or more at weekly auctions since mid-August, after the country’s worst drought in 50 years boosted food prices and led traders to increase bets Bank Rossii will raise interest rates. Citigroup Inc. won’t buy federal bonds that mature after 2013 because borrowing costs may rise, Eugene Belin, the bank’s head of fixed-income in Moscow, said in an interview on Sept. 7.
“The market demand has definitely been focused on short- term OFZs rather than the longer-term bonds because of inflation,” said Elena Kolchina, head of fixed-income products at Renaissance Asset Management, a unit of Renaissance Group, in a phone interview yesterday. “A significant premium does make these bonds much more attractive.”
Yield Premium
Lenders including Moscow-based IFC Metropol and Bank Zenit called in the past four weeks for OFZ yield premiums of as much as 15 basis points, as investors speculate the central bank may lift key interest rates by 1.7 percentage points over the next nine months, according to forward-rate agreements tracked by Bloomberg. Bank Rossii left the refinancing and repo rate unchanged at its Aug. 31 meeting, after 14 cuts between April 2009 and May this year.
Concern that inflation will accelerate is damping demand for longer-dated OFZs, Deputy Finance Minister Dmitry Pankin said in a telephone interview Aug. 18. The Economy Ministry raised its inflation forecast for 2010 this month to as high as 8 percent from 6 percent. The last time annual inflation reached 8 percent was in January.
Russia has sold 314 billion rubles, or 26 percent, of the 1.2 trillion rubles of OFZs it is targeting in auctions this year to cover a budget shortfall forecast to be 5.3 percent of gross domestic product.
‘Accent Shifted’
The world’s biggest energy exporter sold as little as 5.7 percent of the 2014 OFZs offered Aug. 18, as a 13 percent surge in grain prices and a 3.2 percent jump in the cost of dairy products helped inflation quicken to 6.1 percent last month, from a record-low 5.5 percent in July, according to data compiled by Bloomberg.
Demand for the longer maturity OFZs will be “good” today because of that yield premium, Ekaterina Gorbunova, head of credit analysis at Bank of Moscow, said by phone yesterday. “Judging by last week’s auction the accent has shifted to trying to place more.”
Yields on July 2015 OFZs jumped to 7.28 percent yesterday, from a record-low 6.96 percent on Aug. 3. They were unchanged at 7.28 percent today.
Finance Minister Alexei Kudrin sold just 16 percent of the 75 billion rubles of OFZs offered in the government’s biggest- ever federal bond sale Sept. 1, and his ministry started issuing yield guidance soon after in a bid to make the market more “transparent,” according to Mikhail Galkin, head of fixed- income research in Moscow at VTB Capital, the investment banking arm of VTB Group, Russia’s second-largest lender.
Konstantin Vyshkovsky, head of the Finance Ministry’s debt department, and Sergey Shvetsov, Bank Rossii’s head of financial operations, didn’t returns calls from Bloomberg seeking comment.
Emerging Market Demand
Demand for government paper has been increasing throughout emerging markets. International holdings of Indian government and corporate debt climbed 116 percent this year to $16.4 billion as of Sept. 10, approaching the country’s $20 billion limit, according to data from the Securities & Exchange Board of India. The country’s 10-year bonds yield 7.95 percent, the third-highest in Asia. The U.S. benchmark 10-year note yields 2.7 percent, up from 2.47 percent on Aug. 31, this year’s low.
The ruble was little changed at 30.7300 per dollar by 12:05 a.m. in Moscow, and has lost 1.5 percent to the dollar so far this year. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest rate differentials and allow companies to hedge against currency movements, show the ruble at 30.9535 per dollar in three months.
Swaps
The yield on Russia’s dollar bonds due in 2020 fell 4 basis points, or 0.04 percentage point, to 4.60 percent, the lowest level since Sept. 1. The price of the country’s ruble notes due November 2014 were unchanged, with the yield at 6.84 percent for a second day.
The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 3 basis points to 161 basis points on Sept. 13, according to data provider CMA. 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.
Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade, cost 1 basis point less than similar contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 5 basis points to 219, according to JPMorgan Chase & Co. EMBI+ indexes. The difference compares with 154 for debt of similarly rated Mexico and 209 for Brazil, which is rated two steps lower at Baa3 by Moody’s.
The yield spread on Russian bonds is 64 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.
Bank Rossii’s sale yesterday of 619.9 billion rubles of its own debt due March next year may dilute demand for OFZs overall, Luis Costa, an emerging markets strategist in London at Citigroup, said by phone yesterday.
Deposit Accounts
The central bank issues Obligatsii Banka Rossii, or OBRs, to drain cash from the banking sector. Policy makers have sold 1.9 trillion rubles of debt so far this year, helping reduce excess liquidity in the industry by more than 20 percent, according to data compiled by Bank Rossii. Cash held in the central bank’s deposit and correspondent accounts for lenders dropped to 1.1 trillion rubles yesterday, from 1.4 trillion rubles on Jan. 1, according to the bank’s data.
“Oversupply of bonds on the Russian market is a main topic right now,” Costa said. Bank Rossii and the Finance Ministry are “undermining each other.”
Russia will have to “borrow heavily” to plug the budget shortfall, Kudrin said Sept. 8. The government raised $5.5 billion from a sale of Eurobonds in April, its first offering on the international markets since defaulting on $40 billion of domestic debt in 1998, and will be ready to sell ruble- denominated Eurobonds in November, Pankin said the same day. Russia will still have to tap its $40 billion Reserve Fund to plug the hole, Pankin said in July.
No Premium
Russia plans to sell OFZs due June 29, 2011, today at a yield that will probably be less than the market level. Kudrin’s ministry will offer a yield of as much as 4.3 percent in the sale, according to yesterday’s guidance, 5 basis points below what the bonds yielded on the market Sept. 13, according to data compiled by Bloomberg. The Finance Ministry sold 79 percent of the 2013 OFZs offered in last week’s sale, compared with 48 percent of the federal bonds due 2016, according to Bank Rossii data.
A bigger premium on the longer-dated bonds “allows both the Finance Ministry to sell more debt and investors to make some money,” said Alexander Ovchinnikov, a vice president of global markets at Moscow-based Troika Dialog, Russia’s oldest investment bank. Investors will cut bets the OFZ price will fall and buy “a significant amount from the issuer,” he said.
To contact the reporters on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net; Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net
From Bloomberg published on Sep 15, 2010 4:32 PM GMT+0800