Russia sold its first sovereign bonds in euros, along with dollar debt, lured to the 17-nation common currency by the prospect of interest rates staying at record lows.
The government raised 725 million euros ($962 million) of seven-year euro-denominated securities and is selling $6 billion of dollar bonds, according to a person with direct knowledge of the sale, who asked not to be identified as the information isn’t public. Russia priced its euro notes at a 3.702 percent yield, the person said. That compares with 3.51 percent for 10-year debt in the currency from Mexico, which has the same rating at Moody’s Investors Service, data compiled by Bloomberg show.
Russia entered the euro debt market spurred by European Central Bank President Mario Draghi’s Sept. 5 pledge that monetary policy will remain accommodative for “as long as necessary.” Treasury yields have been rising on speculation the Federal Reserve will start scaling back $85 billion of monthly bond purchases at a two-day meeting from Sept. 17.
“The euro was for many years before seen as a more expensive currency, but now it’s not so obvious given the prospects of tapering,” Dmitry Dudkin, head of fixed-income research at UralSib Financial Corp. in Moscow, said yesterday by e-mail. “Draghi promises more accommodation if necessary for years to come.”
The government is also raising $3 billion of 10-year bonds and $1.5 billion in 30-year bonds, both at 220 basis points above U.S. Treasuries, and $1.5 billion of January 2019 securities at 195, according to another person with direct knowledge of the offering, asking not to be identified as the information is private. Russia is rated Baa1 at Moody’s, the third-lowest investment-grade status. South Africa sold $2 billion in 12-year bonds, a person with knowledge of the deal said yesterday.
Bonds in euros have been outperforming dollar debt, with the yield on Russian natural-gas exporter OAO Gazprom’s March 2020 securities dropping 92 basis points from a June 24 peak, compared with a decline of 46 basis points for its similar-maturity dollar bonds. Oil unit OAO Gazprom Neft has sold debt in euros this year as have OAO Russian Railways and state development bank Vnesheconombank.
Draghi has pledged support for the euro-region’s economy after it expanded 0.3 percent in the second quarter, in line with a previous estimate from the European Union’s statistics office. The area’s trade surplus increased to 14.9 billion euros in June, according to Eurostat data.
The euro area’s balance of payments and trade surplus “mean that banks are looking for somewhere to invest,” Dmitri Barinov, who oversees $2.6 billion of debt at Union Investment Privatfonds in Frankfurt and was a buyer of the Russian bonds, said yesterday by e-mail.
While selling seven-year euro notes, Russia canceled a 12-year tranche of euro-denominated bonds as part of an initial plan to raise a maximum of 1.5 billion euros in two parts, one of the people said.
The seven-year portion is the “more normal benchmark,” Richard Segal, the head of international credit strategy at Jefferies Group Inc. in London, said in e-mailed comments yesterday. “Investors wanted to be on the safe side with the shorter maturity.”
Emerging-market bonds, which plunged after Fed Chairman Ben S. Bernanke said May 22 the U.S. could start scaling back measures if the employment outlook signaled “sustainable improvement,” gained Sept. 6 as data showed America added fewer jobs than forecast.
Russia, the world’s biggest energy producer, sold $7 billion of bonds, including 30-year debt, last year with demand totaling $24 billion. The yield on the country’s April 2042 bond climbed 10 basis points to 5.928 percent as of 5:50 p.m. in Moscow, compared with a yield at issue of 5.798 percent. The extra yield investors demand to hold Russia’s dollar debt rather than Treasuries rose two basis points to 242, according to JPMorgan Chase & Co. indexes.
Russia avoided euro-denominated bonds in previous years because of the “severe volatility stemming from the euro-zone sovereign debt crisis,” Blaise Antin, who helps oversee $10 billion of developing-nation debt as head of emerging-market research at TCW Group Inc. in Los Angeles, said by e-mail yesterday.
“It makes sense for Russia to diversify its funding base,” Antin said. The euro market has “stabilized to a considerable degree, enabling Russia finally to tap back into the European real money investor base,” he said.