Moscow Bond Traders Watch as Crisis Sinks Volumes: Russia CreditVladimir Kuznetsov
Russian bond traders are sitting out the deepening crisis with Ukraine as foreign investors pull their cash and losses accumulate.
Secondary-market bond trading volumes on the Moscow Exchange slid 43 percent in April to 759 billion rubles ($22 billion), the biggest year-on-year drop since at least 2010, according to data on the bourse website. South African trading dropped 24 percent to 1.39 trillion rand ($134 billion) last month from a year earlier, Johannesburg Stock Exchange figures show.
The collapse in trading coincides with escalating turmoil as the U.S. and European allies slap sanctions on President Vladimir Putin’s inner circle amid the crisis in Ukraine, threatening to help push Russia into a recession. While bonds have slumped, rising volatility has fueled stock-exchange volumes as investors speculate about whether specific companies and their owners would be targeted for penalties.
“People don’t want to realize the losses suffered in the selloff because of the crisis,” Olga Naydenova, an analyst at BCS Financial Group in Moscow, said by e-mail on May 8. “So bond volumes drop.”
The yield on benchmark bonds due February 2027, which jumped 58 basis points last month to 9.47 percent, stood at 9.07 percent at 6:21 p.m. in Moscow. That compares with a four basis-point increase in April for South African local-currency debt due December 2026, which yielded 8.16 percent today.
Monthly turnover in OFZs over the past year peaked at 1.32 trillion rubles in June, as Russia opened up the market to foreign investors by simplifying settlement and tax procedures.
The share of the debt held by investors abroad dropped about 1 percentage point to 23 percent in February, according to the latest data available from the central bank. That was the lowest level since February 2013, the month Euroclear Bank SA began exchange-based operations for Russian sovereign debt.
Some of the decline in transactions can be accounted for by the arrival of Euroclear, according to Roman Dzugaev, a fixed-income trader at BFA Bank in St. Petersburg.
“The volumes have partially migrated to Euroclear, as it’s easier for foreigners to settle the deals over the counter in their accounts there than open accounts in the National Depository,” he said by e-mail on May 8. “This method of settlement has drawn lots of volumes outside of Russia.”
Unlike bond trading, equity volumes grew 17 percent in April, year on year, buoyed by a 22 percent advance in foreign-currency transactions, according to Moscow Exchange data.
Ruble bonds lost 1.5 percent in April and are down 4.9 percent this year, which if maintained would be the worst annual performance since 2008, according to Bank of America Merrill Lynch indexes.
Policy makers raised Russia’s key lending rate to 7.5 percent on April 25, citing inflation risks, just hours after Standard & Poor’s cut the country’s sovereign rating to one step above junk. Almost eight weeks earlier, the central bank unexpectedly lifted borrowing costs 150 basis points.
The ruble has depreciated 6.3 percent against the U.S. dollar this year, the worst performance after Argentina’s peso among 24 emerging-market peers. The Russian currency was little changed at 35.0295 as of 6 p.m. today.
“The ruble weakening and rate hikes sank the bonds,” Konstantin Artemov, a money manager at Raiffeisen Capital Asset Management in Moscow, said by e-mail on May 8. “When people don’t sell on the falling market but sit out losses in their bonds,” trading activity falls to zero, he said.