Glass Half-Empty as Bonds Perform Worst Since May: Russia Credit

Russia sold 50 percent of the bonds offered at an auction after canceling a planned sale, with the start of Euroclear Bank SA trading unable to prevent the nation’s debt from heading toward the worst month since May.

The Finance Ministry sold 12.2 billion rubles ($399 million) of OFZ debt due in January 2018 at an average yield of 6.2 percent, according to the Moscow Exchange. Ruble bond returns trail those of Brazil, China and India in February after beating them last quarter, JPMorgan Chase & Co. indexes show.

The government axed a sale of 15-year securities at yesterday’s auction, citing an analysis of market conditions, even after Sberbank Investment Research forecast Euroclear’s start may lead to $15 billion of inflows this year. Bonds have retreated in February as Urals crude heads for its worst month in nine amid a resurgence of Europe’s debt crisis.

“The correction on the ruble bond market is mainly down to natural profit taking after the start to Euroclear,” Denis Poryvay, an analyst at ZAO Raiffeisenbank in Moscow, said yesterday by e-mail. “The hopes of some market participants that a significant inflow from non-residents who had yet to buy OFZs haven’t materialized, which has also put pressure on sellers.”

Oil Declines

Urals, Russia’s main export blend, has fallen 4.9 percent in February, poised for its sharpest drop since May when a 15 percent-plunge prompted the government to cancel OFZ auctions. The ruble has snapped three months of gains, weakening 1.7 percent this month against the dollar. The currency was little changed at 30.5405 by 6:18 p.m. in Moscow.

Ruble notes led gains among the BRIC countries in the fourth quarter as investors prepared for Euroclear Bank SA, the world’s largest bond settlement system, to start operations with the debt. Ruble bonds returned 0.2 percent this month as of Feb. 26, compared with gains of 0.8 percent for Brazil, 0.9 percent for India and 0.3 percent for China, according to JPMorgan indexes.

Euroclear started handling over-the-counter transactions of Russian government debt on Feb. 7. Delivery-versus-payment settlement began on Feb. 27, while exchange-based operations are due to start next month, Martin Gregson, a spokesman for Euroclear in Brussels, said yesterday.

Clearstream International SA started custody and settlement services with OFZs today, the company said in a statement. It plans to offer Delivery-versus-payment transactions in the spring and settlement for municipal and corporate bonds in the coming months.

Opposing Trends

“There are currently two opposing tendencies,” Egor Fedorov, a credit analyst with ING Groep NV in Moscow, said by e-mail yesterday. “There are those who bought before Euroclear and are selling now it’s happened, and those who are cautiously entering due to Euroclear, but at far lower yields than we saw last year.”

Demand from non-residents will be “high” in the long-term, he said.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell one basis point to 152 today, according to data compiled by Bloomberg. The swaps cost 10 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.

Sovereign Bonds

Russia is ranked BBB by Fitch Ratings, the second-lowest investment-grade category. A gain in the country’s dollar bonds due in April 2042 lowered the yield five basis points, or 0.05 percentage point, to 4.61 percent. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries was unchanged at 188, according to JPMorgan indexes. The difference compares with 178 for debt of similarly-rated Mexico and 173 for Brazil.

The yield on Russia’s ruble Eurobond due in 2018 dropped two basis points to 6.05 percent, while the rate on the OFZ due in March gained 10 basis points to 6.19 percent. That’s a turnaround from the end of May, when investors demanded 109 basis points of extra yield to hold the domestically traded securities.

The shift was driven by a decline in Eurobond prices that began in January due to a deterioration of the situation on global markets, Alexandr Ermak, head of debt market analysis at Moscow-based Region Broker Co., said yesterday by e-mail.

Russian economic growth slowed in January to 1.6 percent from a year earlier compared with 2.4 percent the previous month, the Economy Ministry said Feb. 22 in a website report. An acceleration in inflation to 7.1 percent prompted the central bank to keep its interest rates on hold in January.

“The weakening ruble rate, the significant decline in the oil price, accelerating inflation and slowing economic growth are all factors pressuring the ruble debt market,” Ermak said.

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