Russian Billionaire Seizes on Liquidity Largesse for New Bonds

  • Banks deploying cash from wealth fund drive down yields
  • Alfa cuts yield premium to government bonds to 89 bps from 235

The bank controlled by Russian billionaire Mikhail Fridman is seeing first-hand the benefits of a government program to funnel sovereign wealth funds into the financial system.

Alfa-Bank PJSC set prices on 5 billion rubles ($77 million) of bonds Wednesday, offering a two-year put option at a 9.99 percent yield, a premium of about 89 basis points to Russian government bonds. That compares with a spread of 235 basis points in June 2014, according to data compiled by Bloomberg. The Moscow lender joins 15 companies that have sold ruble bonds since the start of July to take advantage of the lowest-ever spreads recorded by a Bank of America Merrill Lynch index of Russian corporate debt.

Russian banks are sitting on the most cash in five years, making them eager buyers of bonds as well as sellers. The recent drop in yield premiums can be attributed to this demand, according to Evgeny Batuev, head of the trading department at SKB-Bank. The Finance Ministry spent 2.6 trillion rubles of accumulated oil riches from the $50 billion rainy-day sovereign wealth fund last year to cover a budget deficit and injected a further 780 billion rubles this year. 

“Everyone swims in cash," said Konstantin Artemov, a money manager at Raiffeisen Asset Management in Moscow. "Spreads are baffling.”

The Bank of Russia this week launched operations to stop the buildup of surplus cash in the economy because of the threat the liquidity will spur price growth and frustrate its inflation targets. The central bank took 100 billion rubles on one-week deposits in an effort to drain the excess.

"As long as there exists the liquidity surplus there’s no point to expect any normalization in spreads," Artemov said.

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