Goldman Sees $30 Billion as Structured Sales Soar: Russia Credit

Investors are buying record amounts of notes paying returns based on ruble bonds as Russia prepares to open the market to foreigners, triggering inflows Goldman Sachs Group Inc. (GS) estimates may reach $30 billion.

Sales of the structured notes reached $641 million between July and September, the most since Bloomberg began compiling the data in 1999. Russia’s so-called OFZ bonds gained 3.8 percent during the quarter as yields tumbled 43 basis points to 7.25 percent, JPMorgan Chase & Co. indexes show. The average yield on similarly rated Mexican government bonds slipped eight basis points to 5.7 percent, the indexes show.

Russia plans to expand the investor base for its 3.1 trillion-ruble ($96 billion) Treasuries market by allowing foreign investors to buy and sell through Euroclear Bank SA, the world’s biggest bond settlement system, after five years of discussion. The move will attract $20 billion to $30 billion by mid-2013, Clemens Grafe, chief economist for Goldman Sachs in Russia, said in a Moscow interview on Sept. 27.

“Euroclear will make the Russian domestic bond market more accessible to a wider range of investors,” Natasha Smirnova, who helps manage $4 billion of emerging-markets assets as a product specialist at PineBridge Investments in London, said by e-mail yesterday. “This should result in a bigger, deeper bond market over time.”

Central Depository

While Mexican bonds have been traded through Euroclear since 1995, Russia’s Justice Ministry last week registered an order by the market watchdog listing the settlement systems allowed to open nominal holder accounts with a central depository. Trading via Euroclear may happen as soon as December if a single depository is created by November, Stephan Pouyat, head of Brussels-based Euroclear’s global product management, said on Sept. 13. That timescale hasn’t changed, he said by e- mail yesterday.

Credit Suisse Group AG is the biggest seller this year of structured notes at $587.8 million, followed by Citigroup with $244.6 million and JPMorgan with $199.2 million, according to data compiled by Bloomberg.

Also known as credit-linked notes, the securities offer higher yields and tailored maturities that may not be available in the bond market. Investors suffer losses if there’s a default either by the bank issuing the note or the reference entity.

Ruble bonds returned 3.8 percent in the third quarter, compared with a 2.6 percent gain for Indian debt and a 0.5 percent decline for Chinese bonds, according to JPMorgan indexes. Brazil’s bonds rallied 7.5 percent, the data show.

Foreign Ownership

VTB Capital said in July that the 6 percent of the OFZ market owned by foreign investors may jump fivefold in the first half of next year once the market opens up. The growth of the OFZ market and impact on capital flows will depend on the level of issuance by the Finance Ministry, Goldman’s Grafe said.

“The $30 billion inflow from liberalization seems realistic but it could take two to three years,” Euroclear’s Pouyat said yesterday. “We have to look at it more as a catch- up compared to other emerging markets, as today the percentage of foreign investors on OFZ is relatively low. Now, as for how soon it will catch up, it all depends on how Russia as a country will perform.”

Russia’s Finance Ministry plans to sell as much as 335 billion rubles of so-called OFZ bonds in the fourth quarter, the biggest three-month offering for at least a year. The government is selling 130 billion rubles this month, starting with 25 billion rubles of 15-year notes tomorrow.

Ruble Appreciation

The ruble gained 3.6 percent versus the dollar in September. It slid 0.2 percent to 31.1121 per dollar by 5:07 p.m. in Moscow. Non-deliverable forwards, which provide a guide to expectations of currency movements, showed the ruble at 31.6010 per dollar in three months.

Russia is rated Baa1 by Moody’s Investors Service, the third-lowest investment-grade ranking. Russian sovereign dollar bonds due in April 2020 rose, lowering the yield by six basis points, or 0.06 percentage point, to 2.685 percent. The yield on domestically traded notes due in June 2017 lost three basis points to 7.49 percent. The yield on Russia’s international ruble bond due in March 2018 declined two basis points to 6.225 percent.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell two basis points to 142, according to data compiled by Bloomberg. The swaps cost 13 basis points less than contracts for Turkey, which is rated three levels lower at Ba1 by Moody’s. 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.

Yield Gap

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries dropped five basis points to 202, according to JPMorgan EMBI Global indexes. The difference compares with 165 for debt of similarly-rated Mexico and 153 for Brazil, which is rated one step lower at Baa2 by Moody’s.

The yield on ruble government debt has fallen 67 basis points from this year’s peak on June 4 to 7.25 percent as of Sept. 28, compared with a decline of 63 basis points for emerging markets to 5.80 percent, according to JPMorgan indexes.

Market liberalization could spur an increase in foreign ownership of OFZ bonds to 20 percent from the current 6 percent, according to Elena Kolchina, head of Renaissance Capital’s fixed income group. Opening up the market could reduce yields by about 100 basis points over the next six months, she said yesterday in e-mailed comments.

“This trend could be sustained and not a short-term rally,” Kolchina said. “It could last for years.”

To contact the reporters on this story: Lyubov Pronina in London at lpronina@bloomberg.net; Alastair Marsh in London at amarsh25@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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