Russian Bonds Lose to Emerging Markets as Yield Gap Drops to 10-Month Low
Russia’s borrowing cost advantage is falling to a 10-month low as the economic recovery in the world’s largest energy exporter lags behind peers and almost $12 billion of debt sales outstrip investor demand.
Yields on foreign-currency debt sold by Prime Minister Vladimir Putin’s administration were 54 basis points, or 0.54 percentage point, less than the emerging-markets average yesterday and touched 47 on July 20, the smallest gap since September, according to JPMorgan Chase & Co.’s EMBI+ Indexes. Five months ago, the spread was 105.
Russia’s bonds returned less than emerging-market debt for six months, the longest streak since 2006, according to JPMorgan data. Government yields are about 60 percent below the average since 1997. That’s hurting demand as the economy expanded 2.9 percent in the first quarter, compared with 8.95 percent in Brazil and 11.9 percent in China.
“At these levels there’s not a lot of screaming value” in Russian sovereign debt, said Edwin Gutierrez, a London-based emerging-market money manager at Aberdeen. The firm’s $531 million Aberdeen Emerging Markets Bond Fund beat 84 percent of peers in the past year, according to data compiled by Bloomberg. “They happened to price a lot of bonds almost at the market top. Among the BRIC economies, Russia is the laggard.”
Russian debt has underperformed as investors speculated spending cuts by indebted European countries and China’s efforts to slow its economy will curb global demand for oil, Russia’s largest source of export earnings. Gross domestic product will probably expand 4.3 percent this year, compared with 6.8 percent in developing nations as a group, according to the International Monetary Fund. Crude has slumped 9.4 percent from this year’s closing high on April 6 to $78.65 a barrel in New York.
The government’s foreign-currency debt returned 4.3 percent from January through July 21, about half the 8.3 percent rally in global emerging-market bonds, according to EMBI+ Indexes. The extra yield investors demand to own Russia bonds over U.S. Treasuries was 244 basis points yesterday, compared with 298 for emerging markets, according to JPMorgan’s EMBI+ Index. Similarly rated Mexico notes trade at 167 and Brazil, which is rated one step lower at BBB- by S&P, has a spread of 216, according to JPMorgan’s EMBI+ Indexes.
Russian sovereign yields fell to a record low 4.9 percent on April 20 and were at 5.18 percent on July 21. That compares with an average 13.4 percent since the JPMorgan index started in December 1997. Russia has a BBB rating from Standard & Poor’s, the second-lowest investment-grade ranking.
The cost of protecting Russian debt against non-payment for five years with credit-default swaps dropped about 3 basis points to 170 basis points on July 21, according to London-based CMA’s prices. Default swaps, which rise as the perception of credit quality deteriorates, 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.
The yield on ruble bonds sold by state-controlled gas producer OAO Gazprom is 220 basis points more than the same- maturity Gazprom debt in dollars, down from a yield difference of about 600 a year ago, data compiled by Bloomberg show. The spread narrowed to as little as 115 on June 14.
The ruble strengthened 0.1 percent to 30.425 per dollar in Moscow yesterday. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements as they allow foreign investors and companies to fix the exchange rate at a specific level in the future, show the ruble weakening to 30.5612 per dollar in three months.
The government’s $5.5 billion April bond sale, the first international issue since Russia defaulted on $40 billion of ruble debt in 1998, is the most dollar debt sold by an emerging- market government this year, according to data compiled by Bloomberg. State companies, led by Vnesheconombank and OAO Sberbank, issued $6.4 billion of debt.
Russian debt is likely to outperform emerging-market peers as issuance slows, said Jeremy Brewin, head of developing-nation bonds at Aviva Investors in London, which oversees about $377 billion.
“We had quite a bit of Russian supply and it means the range of investors in Russian debt need more time to absorb it,” Brewin said in an interview. “The Russian asset class, in particular the sovereign and the sub-sovereign, they have some good value.”
Russia raised 34 billion rubles ($1.1 billion) less than offered at two bond auctions on July 21 as investors demanded higher yields than the government was willing to pay. The Finance Ministry has sold about 21 percent of the 1.2 trillion rubles of bonds planned for this year to plug its second budget shortfall since 1999.
Economic growth may continue to trail peers because Russian banks are reluctant to lend, said Aberdeen’s Gutierrez. Total lending rose 2 percent in June, down from a 2.6 percent gain in May, Mikhail Sukhov, a central bank board member, said in St. Petersburg on July 8.
“It does have an impaired banking system, and that unfortunately isn’t going to change in the near term,” said Gutierrez. “Credit is not going to be a strong engine of growth.”
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