Japanese Investors Bet on Russia Rate Drop With Zero-Coupon Bond

Investors in Japan are embracing a new structure for ruble-denominated notes, buying long-term zero-coupon bonds betting interest rates in Russia will fall.

Some 3.5 billion rubles ($97 million) of 15-year uridashi notes that are issued at a discount and pay no interim interest have been sold to individual investors in Japan from March, data compiled by Bloomberg show. Previously, all uridashi denominated in rubles paid coupons and tenors averaged about five years. Russia’s Micex Index plunged to the lowest in four years March 14 ahead of a referendum where a majority of Crimeans voted in favor of leaving Ukraine to become part of Russia.

Policy makers in Russia have raised the benchmark interest rate three times since February amid the nation’s worst standoff with the U.S. and its allies since the Cold War. Borrowing costs are expected to decline from 8 percent to 6.25 percent by the end of 2015, according to the median estimate of economists surveyed by Bloomberg News. Five-year government notes yielded more than 10-year debt last week for the first time since June 2012 as the U.S. and European Union toughen sanctions.

“By buying zero-coupon bonds, investors stand to benefit from stable or decreasing rates without risking any more than what they paid for should the situation in Russia and Ukraine escalate,” Richard Anund, a senior director who oversees funding and lending activities in Asia at Svensk Exportkredit AB, said in an e-mail Aug. 4. Investors are buying the longer-maturity debt “for their kids or as part of their pension plan,” he said.

Sale Discount

Japanese investors, faced with near-zero returns at home, are increasingly searching for higher-yielding options abroad. Under Prime Minister Shinzo Abe, Japan has embarked on a program of record stimulus, fiscal spending and deregulation to defeat deflation and spur growth.

Sweden’s export-financing arm sold 1.15 billion ruble of bonds July 31 at just 34.2 percent of the notes’ face value. That equates to an annualized yield of about 7.41 percent over the notes’ 15-year life, without taking into account exchange rate fluctuations.

Utrecht, Netherlands-based lender Rabobank Groep sold another 1.15 billion ruble of notes June 20 while Deutsche Bank AG issued the remaining 1.2 billion rubles of securities March 31, Bloomberg data show. Rabobank’s notes were sold at 33.4 percent of face value and Deutsche Bank’s at 31.1 percent.

Waning Demand

Ruble-denominated notes make up just 0.53 percent of this year’s total $20.3 billion-equivalent uridashi bond issuance, according to data compiled by Bloomberg. Uridashis are notes issued outside Japan for sale mainly to Japanese individual investors.

Sales of structured notes tied to the debt of Russian entities slowed last month to the least this year as investor demand for assets in the nation waned. JPMorgan Chase & Co. sold the last credit-linked note on July 15, one day before the U.S. imposed sanctions on large Russian banks and companies.

The ruble, which has depreciated 9.1 percent against the dollar since Dec. 31, is expected to strengthen to 35.73 by the end of 2015, according to the median estimate of analysts surveyed by Bloomberg News. It fell to a three-month low yesterday, down 0.3 percent to 36.1775 per dollar, amid warnings President Vladimir Putin may send troops into Ukraine.

“We’ve been quite bearish on the ruble due to monetary policy, macroeconomic and geopolitical reasons,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said via e-mail Aug. 6. “But five years is an extremely long period to say anything about the ruble, let alone 15.”

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