Aberdeen’s Russian Bond Trade for 2015 Joined by GoldmanMaria Kolesnikova and Lyubov Pronina
Aberdeen Asset Management Plc says Russian bonds will rebound in 2015, and is putting money on it.
Inflation will be curbed and the ruble will stabilize from the middle of next year as Russia’s central bank raises interest rates further, according to Viktor Szabo at Aberdeen in London. The money manager boosted its holdings of the January 2028 ruble security by 1.55 million in the third quarter, to 1.7 million bonds with a face value of 1,000 rubles ($23.99), according to company filings on Bloomberg.
“Rate hikes can still push yields higher, but once the ruble stabilizes, we can see a fast fall in inflation,” Viktor Szabo, who helps oversee $13 billion in emerging-market debt, said Oct. 22 by e-mail. “This is a trade for 2015.”
Aberdeen is not alone betting on a rebound in ruble bonds as Goldman Sachs Group Inc., which filings show increased holdings to the end of June, is “positive” on long-maturity OFZs. Russian assets have tumbled as sanctions stemming from the crisis in Ukraine helped send inflation to a three-year high and as oil fell into a bear market.
While the 2028 bonds dropped in July and August, they gained the most since May in September. The debt fell yesterday to the lowest level in a week, pushing up the yield 14 basis points to 9.96 percent. The yield fell one basis point as of 2:16 p.m. in Moscow today.
The ruble had the steepest drop in the world since June and Russia axed bond auctions amid sanctions imposed by the U.S., European Union and other countries. Stronger inflationary expectations will force the central bank to “consider seriously” more rate increases this year, Sergei Shvetsov, a first deputy governor, said on Oct. 22.
Moody’s Investors Service reduced Russia’s government debt one step to Baa2 on Oct. 17, citing the effect of sanctions on the Russian government. Standard & Poor’s, which cut the sovereign to BBB- in April, may lower the country to junk as early as today, Tatiana Orlova, an economist at Royal Bank of Scotland Group Plc. in London, said in a note yesterday.
Trading in forward-rate agreements shows bets borrowing costs will climb 177 basis points in three months. They reached 200 points on Oct. 13, the most since October 2008.
Bank Rossii Governor Elvira Nabiullina has made curbing consumer-price growth a priority, raising the key one-week rate by 250 basis points this year to 8 percent. Policy makers, who are due to discuss rates next on Oct. 31, resumed currency interventions in October, spending more than $15 billion to limit the slide that took the ruble below 40 to the dollar for the first time.
Investors can expect “decisive action” from the central bank and the key rate reaching 10 percent shouldn’t be ruled out, Aberdeen’s Szabo said. That will help slow inflation from the level of 8 percent seen in September to 5 percent to 6 percent by the end of next year, he said.
Penalties imposed by the U.S. and EU included limiting the access of banks with state participation to debt markets. Brent crude, the benchmark for about 50 percent of the world’s oil, has dropped more than 20 percent from this year’s peak, meeting a common definition of a bear market.
Russia’s bonds may be “attractive” in a scenario where the U.S. and EU end sanctions and the situation returns to normal, according to Konstantin Nemnov, the head of fixed income at TKB BNP Paribas Investment Partners in St. Petersburg.
“If you take the view that funding will remain closed for our economy, and the situation continues to deteriorate, then OFZs are not attractive and it’s better not to hold this position,” he said by phone Oct. 22.
While some investors focus only on the geopolitical situation given the conflict in Ukraine, Russia’s ratio of debt to gross domestic product stands at around 10 percent, said Jan Dehn, head of research in London at Ashmore Group Plc, which oversees $71.3 billion of emerging-market assets.
Goldman Sachs asset managers took the share of 2028 OFZs in their emerging-market funds to 2.5 percent of the notes outstanding as of June 30, according to filings on Bloomberg.
While the central bank may raise interest rates by 50 basis points at its next meeting, the cycle of increases is close to an end, Goldman analysts including Ahmet Akarli and Clemens Grafe wrote in an Oct. 17 report.
As inflation decelerates “more meaningfully” from the second quarter, “rates can be eased,” the analysts said, predicting 250 basis points of cuts next year. Goldman is “positive” on hard-currency debt and long-maturity OFZs, they said.
While the central bank may raise rates again, policy makers will be able to cut them eventually, according to Bryan Carter, a money manager at Acadian Asset Management, which oversees about $450 million of emerging-market bonds.
“It doesn’t make any sense to be underweight Russia,” he said in a London interview yesterday. “The question is more of a timing question and it’s almost geopolitical at this point, when inflation will start to come down and therefore interest rates.”