Euroclear Arrival Comes Up Short at 5-Year Sale: Russia Credit

Euroclear Bank SA’s announcement that it’s starting settlement of Russian government bonds proved insufficient to buoy investor interest in five-year notes as the Finance Ministry’s premium at yesterday’s sale was erased.

The government sold 13.6 billion rubles ($452 million) of new 2018 debt, or 68 percent of the offering, at an average yield of 6.27 percent at the auction, the Finance Ministry said. Similarly rated Mexican debt maturing in December 2018 yielded 4.63 percent yesterday.

Euroclear said it will start direct settlement of Russian ruble-denominated government debt today, opening the $100 billion market to foreign investors, who will no longer need to use local brokers. While Russia sold all of a reduced 15-year offering, the sale of shorter-dated notes was helped because the ministry redeemed 100 billion rubles of two-year debt, according to UralSib Financial Corp.

“The results cannot be called especially auspicious,” Olga Sterina, an analyst at UralSib in Moscow, said yesterday by phone. “There was a little premium at the upper range, but then there was a sell-off and the premium was eliminated.”

The ministry had offered the new shorter-dated notes at a yield of between 6.20 percent to 6.30 percent, whereas the rate on notes due in March 2018 climbed to as high as 6.32 percent on Feb. 5, according to data compiled by Bloomberg.

Plans Changed

The government had planned to offer 20 billion rubles of 15-year bonds at yesterday’s auction, according to the ministry’s preliminary schedule for the first quarter. It sold 10 billion rubles of the debt at a rate of 7.1 percent, the lower end of yield guidance.

“If not for Euroclear announcement, I doubt there would have been any demand all for the 15-year bond,” UralSib’s Sterina said.

Local banks dominate the OFZ market, which the Finance Ministry valued at 3.2 trillion rubles at the end of last year. Non-residents hold about 6.5 percent of the debt, compared with the 17.6 percent foreign investors hold in Turkey and 29.7 percent in Mexico, according to Russian Finance Ministry and International Monetary Fund data. The government had been in discussion with Euroclear for “many years,” the ministry said in December.

Settlement system Clearstream International SA is at an “advanced stage” in establishing a direct link with Russia’s Central Settlement Depositary, Jessica Sicre, a spokeswoman, said by e-mail yesterday.

Longer Bonds

Over-the-counter transactions in OFZs will be followed by exchange-traded operations in March, Euroclear said. Overseas buyers generally prefer longer bonds, according to Vladimir Kolychev, head of research at OAO Rosbank, a Moscow-based unit of Societe Generale SA.

“Pension and insurance funds naturally prefer long bonds, while speculative hedge funds also may now be targeting long securities to maximize profits,” he said by e-mail yesterday.

Access to municipal and corporate debt markets is set to follow “in the coming months,” Euroclear said in yesterday’s statement.

The yield on the OFZ due in February 2027 dropped 134 basis points since the end of September to a record 6.84 percent on Jan. 1. The rate fell five basis points to 7.03 percent today. The ruble gained 0.2 percent to 30.0220 against the dollar by 4:22 p.m. in Moscow. Ruble futures expiring in March showed the currency at 30.2010 per dollar.

Global Investors

The opening up of the OFZ market will “prompt some international allocations,” Peter Wilson, a senior portfolio manager at Wells Fargo Asset Management in London, said by e-mail yesterday.

“Going forward I expect more of the portfolios we manage to be able to consider this market,” he said. “The opportunity set for global investors has been growing and the ease of settlement that this offers will be further encouragement.”

Russia is ranked BBB at Fitch Ratings, the second-lowest investment-grade category. The yield on Russia’s dollar bonds due in April 2042 dropped two basis points, or 0.02 percentage point, to 4.51 percent today. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell two basis point to 173 basis points, according to JPMorgan Chase & Co. indexes. The difference compares with 164 for debt of similarly-rated Mexico and 154 for Brazil.

Cost Protection

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell one basis point to 141 basis points, according to data compiled by Bloomberg. The swaps, whose prices fall when investor sentiment improves, cost eight basis points more than Turkey, which is rated one step lower by Fitch at BBB-. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

The Euroclear announcement means it’s time to buy sub-federal and corporate bonds, because spreads are very wide as the securities haven’t caught up with the OFZ rally, according to Evgeny Kochemazov, director of fixed income at Alfa Capital in Moscow. Alfa increased allocations in BBB corporate securities and sub-federal notes at the end of January, he said yesterday by phone.

“I take this news as a signal to cut positions in OFZs,” Kochemazov said.

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