- Corporate bond supply tumbles by $31 billion since sanctions
- Yields slide toward record amid supply crunch, rate hunt
Russian corporate bonds have become so scarce under sanctions they’re leaving yield-chasing investors desperate to buy more.
Since U.S. and European penalties largely cut Russian issuers off from global financing in early 2014, the supply of hard-currency debt from companies has tumbled by $31 billion, or 19 percent, according to data compiled by UralSib Capital. That’s created a dearth of bonds for money managers seeking refuge this year from near-zero rates.
“There is a kind of gold-dust premium in Russia,” said Ariel Bezalel, who oversees Jupiter Asset Management Ltd.’s $7 billion Dynamic Bond fund as a money manager in London. “There have been times when we’ve looked to increase our exposure in certain issuers and we can’t. There’s just none around.”
Russia is at the epicenter of a liquidity crunch in emerging-market debt caused by a sudden surge in demand for higher-yielding assets as Britain’s vote to leave the European Union in June prompted a fresh wave of stimulus measures from central banks worldwide. Since sanctions barred many Russian companies from issuing debt abroad, some have bought back bonds, further exacerbating the supply squeeze.
As demand outstrips supply in the world’s largest energy producer, corporate bonds have rallied, sending yields down 183 basis points on average this year to 4.24 percent, within 37 basis points of a record low set in January 2013, according to Bank of America Merrill Lynch indexes. That’s mirrored in rates across emerging markets, which are down 170 basis points in the period to 4.8 percent, and compares with a yield of 1.60 percent in 10-year Treasuries and minus 0.05 percent for similar-maturity German bonds.
Declining yields and rising valuations aren’t discouraging investors, who poured $14 billion in emerging-market debt funds in July, the biggest monthly inflow on record, according to EPFR Global data.
“When there are big inflows, the scramble for bonds can be bigger,” said Siddharth Dahiya, who helps oversee about $11 billion including in Russian bonds at Aberdeen Asset Management Plc in London as head of emerging-market corporate debt. “It’s a bit of a challenge to find bonds but you can always buy them. You just have to pay a little bit more for them.”
Bond scarcity in the secondary market is forcing larger funds to rely on new offerings to meet portfolio allocation requirements, according to Joep Huntjens, a money manager at Netherlands-based NN Group NV, which oversees about $8 billion in emerging-market debt.
“Selling is easy in this environment, but buying bonds is difficult,” said Huntjens, who has an overweight position in Russian debt. “In Russia the situation is especially tight because a lot of the issuance we have seen has been used to tender some existing bonds.”
While unsanctioned companies like Gazprom PJSC and steelmaker Evraz Group SA have returned to international markets in recent months, sales of Russian hard-currency corporate bonds have dwindled to about $4 billion this year, a 10th of the record volume in 2013. VTB Group, which was barred from selling debt abroad, bought back about $1.6 billion of bonds last year.
The supply squeeze leaves investors vulnerable to sudden changes in the environment and shift in demand. Sentiment toward Russian debt could quickly change amid a drop in the price of oil, the nation’s main export earner, or an unexpected political event, according to Anton Kerkenezov, a money manager who helps oversee about $5 billion of emerging-market bonds at Aviva Investors in London.
For now, the hunt for yield is offsetting concern about geopolitics and oil prices, which are trading near a three-month low. Russian corporate bonds have handed investors returns of 23 percent in the past two years, the most among peers after Argentina, according to Bloomberg USD Emerging Market Corporate Bond indexes.
“Valuations are somewhat stretched at the moment, but I don’t really see any need to sell them,” said Jupiter’s Bezalel. “I don’t see any catalyst that would lead to the prices going lower at the moment because the bond market is shrinking.”