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Opinion
April 20, 2018 www.intellinews.com I Page 24
While QE winds down in the US, the Europeans are further behind. The ECB announced last year that its €30bn a month asset purchase pro- gramme would continue until September 2018.
It is unlikely that the ECB, Bank of England or Bank of Japan will raise rates anytime soon. Excessive liquidity from Europe and Japan con- tinues to support debt markets. However, it is already apparent that current market conditions are drastically different this year from those of the previous years.
A “new normal” is gradually asserting itself in the international capital markets.
The increase in US Treasury securities yields has led to an overestimation of the attractiveness of premiums by investors in emerging markets. This has resulted in the increase in the capital flow into dollar bonds with higher credit quality, which has started to provide conservative investors with an acceptable level of yields. That could be bad news for EM investors and issuers. According to the Institute of International Finance (IIF), net capital outflow from EM assets-oriented funds amounted to $4.5bn billion in February alone.
Despite an upbeat macroeconomic story in EMs, the falling demand for their Eurobonds is driving up the yields of Eurobonds in emerging markets.
The yields of sovereign Eurobonds from Eastern Europe have grown by 64bp since the beginning of the year, from Africa by 49 bp, and from Asia by 44 bp. JPMorgan’s global EM bond (TR) index has decreased by 2.3% this year after the total yield grew by 9.1% in 2017.
Falling demand will put more pressure on the market as a significant volume of bonds mature in the mid-term and will be more difficult to refi- nance.
The volume of debt obligations that must be repaid in the course of just the next two years amounts to $513bn. Issuers will be forced to enter
the market with new issues to refinance outstand- ing debts.
Due to the decrease in demand for new issues these will have to be issued at a premium to the prevailing market rates. Thus, in the foreseeable future we may see Eurobonds yields in EMs con- tinue to grow, while at the same time the level of activity in the primary market will remain high.
Russia back to investment grade
Russia is in a stronger position than most in the more demanding market.
In February, international ratings agency Stand- ard & Poor’s (S&P) rating agency raised Russia’s foreign currency credit rating to BBB-, returning the issuer to an investment grade rating.
Russia was rewarded for its conservative fiscal policy, low debt-to-GDP ratio as well as copious foreign currency reserves that topped $457bn at the start of April.
The investment grade credit rating significantly increases the number of potential investors. Ex- perts estimate potential passive capital inflow to Russia’s Eurobonds could be $2bn as a result of the upgrade in the short term. Increasing demand should lead to the decrease in yields, which will only encourage the Russian Ministry of Finance to issue more bonds.
Against this, Russia remains vulnerable to politi- cal risks, which have rapidly escalated in the last few months. In March, the British government announced it was mulling imposing restrictions on trading Russia’s debt securities on the London Stock Exchange and banning the clearing com- panies Euroclear and Clearstream from working with Russia’s Eurobonds. No decision was made in the end, but these fears are still lingering in the background.
In the middle of March in the midst of the scandal that followed the poisoning of the former spy Ser- gei Skripal, Russia’s Ministry of Finance hurried