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data for Q1 2017.
The new data supports an idea that the share of non-residents in OFZ placements this year has decreased dramatically to 40% vs. 80% in 2016, likely due to smaller yield premiums which OFZs offer compared to other EM bonds.
Local banks increased own positions in OFZ only by RUB34.6bn. Thus, these two groups of investors bought only RUB173.8bn of OFZ in Q1 2017, or less than 50% of total placement.
This means that there has appeared another group of investors (either non-banking resident entities or other non-residents). According to the CBR, local subsidiaries of foreign banks bought RUB140bn of OFZ which were not booked to their accounts for such an amount. Usually such operations are connected with the sale of OFZs to non-residents on OTC market though this should have been accounted for as normal capital inflows.
Bankers do not rule out that there could be some large local players among these investors . Meanwhile stable demand continues to support the OFZ market this year. Thus, the key risk for the market now is the amount of potential demand left from this group of investors.
Russian bonds have been hot for a while on the back of the carry trade,
as the ruble strengthens making investors as much if not more on the exchange rate as on the attractive bond yields: the ruble has gained 8.7% YTD – one of the strongest performances of any currency this year. Most of the investment came in the second half of the month after the US Federal Reserve laid out an unexpectedly dovish rate-hike outlook, Russia’s central bank said in a report on April 20.
Demand for the Ministry of Finance OFZs has continued to be strong in April, allowing the ministry of sell all RUB39.5bn of 2019 and 2033 notes offered this week.
The OFZ will play a key role this year in financing an expected budget deficit on the order of 1.5% to 2.5% of GDP depending on oil prices. Last year the budget allowed the ministry to tap the OFZ market for RUB300bn but that was raised to RUB500bn in the second half. However, this year and for the next two years, the budget allows the ministry to issue a massive RUB1.2 trillion to cover any budget short fall. The Russian government is also expected to tap the international markets for about $3bn in Eurobond issues this year, depending on market conditions and international politics.
Bid-to-cover ratios in the auctions were “unexpectedly high,” said Richard Segal, a London-based analyst at Manulife Asset Management. The central bank’s statement is “a good hint that foreign investors drove much of the auction demand,” he told Bloomberg.
Russia’s benchmark February 2027 ruble bond climbed for a second day on April 20, with the yield falling to 7.89%, according to Bloomberg.
93 RUSSIA Country Report April 2017 www.intellinews.com