Page 34 - Eastern Europe Outlook 2020

One of the first issuers to tap the ruble bond market was​ ​Gazprom Neft​ that sold RUB25bn at 6.8%, oversubscribing the issue three-fold and lowering the original yield guidance by 25bp.
In October 2019 the placement of ruble bonds hit its highest level since 2015 at 60 new issues, according to Sberbank. A total of RUB13 trillion ($220bn) of ruble bonds were outstanding as of October 1, 2019, according to the CBR. The domestic corporate bond market has surged 2.5-fold since the introduction of sanctions against Russia.
A strong ruble and expectations of further rate cuts will support issuance in 2020 and new names are coming to the ruble bond markets, the analysts believe. The net issuance in 2019 could increase by 25% to RUB2 trillion, VTB Bank estimates.
Banks are the main buyers of corporate ruble bonds. With the liquidity surplus in the banking system in 2020 expected by the CBR to increase from RUB3 trillion to RUB4.6 trillion, the demand from this segment is to remain strong. Corporate bonds are also looking more attractive than the OFZ federal bond issues.
● OFZs
2019 saw a massive inflow into Russian Ministry of Finance ruble-denominated OFZ treasury bills as yield-hungry investors snapped up the Russian paper.
According to the CBR, in October, non-residents’ net increase of OFZ holdings (RUB+220bn) hit all-time monthly high. Huge demand in large bids was mostly met at the primary placement auctions, while the secondary market activity was subdued.
In October, the finance ministry did not offer such huge amounts at the primary market and investors switched to the secondary market, signaling that there was still demand from typical non-residents. This resulted in a slump in OFZ yields (by 65bp for 10Y papers).
“Interestingly, the local investors cut their OFZ holdings by RUB145bn in October. They likely believe that the rally has gone too far as currently, the OFZ yields imply the RUB key rate at 5-5.5%. In general, we think that the key drivers of this rally are unrealized expectations on the tightening of sanctions and the Fed’s monetary easing,” said Raiffeisen Bank (RZB) said in a note.
“In 2019 there was an exceptionally strong inflow of non-residents onto the OFZ market provided large support for the ruble. Without it, the RUB would have been weaker to the $by 2 rubles, according to our estimate. Given the already materialised dramatic drop in OFZ yields that makes Russian bonds the most expensive among GEM (in terms of spreads to o/n rates), we doubt that in 2020 there will be a comparable inflow on the market,” said RZB.
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