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March 22, 2019 www.intellinews.com I Page 4
market in the short term given the high degree of pessimism in EM stocks overall.”
Bond market record auctions
Bonds are a different story. “Investors are losing faith in EM stocks, but bonds remain attractive,” says Smolyani. “Bonds’ divergence from equities is only gathering pace. Contrary to equities,
EM bonds continue to attract new money. This unusual divergence between the usually positively correlated asset classes became visible from mid-February, and has since only gained pace.
As a result, Russian bonds are set to continue beating stocks in the medium-term.”
Bonds remain a lot more attractive than equities, but there has been a minor outflow over the
last ten weeks, according to EPFR Global, from the Russian dedicated bond funds, while the more general funds with Russian exposure
saw outflows of circa $30mn in the last week compared with $60mn of outflows the week before.
President Vladimir Putin boasted during his state of the nation speech in February that Russia has enough in its forex reserves to cover its external debt dollar for dollar with cash for the first time ever, making Russia’s domestic treasury bills, the so-called OFZs, a very solid bet.
Politics still plays a role and has driven up the cost of borrowing – but that only increases the appeal of Russian bonds. Yields on the OFZs
fell to around 7% in 2018 as international bond investors went overweight Russian fixed income instruments and increased their share in the total outstanding debt to 34% in April. However, four rounds of sanctions and the threat that the new DASKAA sanctions, due to be enacted this April, may target state debt began a sell off. Investors dumped RUB500bn ($7.6bn) worth of the bonds, reducing their share to 24%. Last autumn the Ministry of Finance had to cancel several weekly auctions for the first time in years due to lack of demand, while yields crept up to touch 9%.
The end of the Fed’s easing has changed all that as bond traders go back to “risk on” in the “hunt for yield” that has marked much of bond investing over the last few years.
Russia's Ministry of Finance held an all-time record-high weekly OFZ treasury bond auctions on March 13, placing securities worth RUB94bn ($1.44bn) and beating the previous record sale of February 27 when RUB58bn of federal bonds were sold.
However, things are still not perfect. The ministry is offering shorter-term bonds and the yields are still high: the RUB34.7bn worth of three-year bonds placed this week had an 8% coupon and 10-year issue worth RUB56.7bn yielded 8.47%. Both issues were placed with almost no premium to market, white total demand for two auctions reached RUB144bn.