Bonds versus deposits: whose yield is higher

For a long time, most private investors avoided the debt market, considering it difficult. Although in fact it works quite simply: there are issuers (companies or the state) who need money to finance projects, and there are investors – banks, companies and citizens who are ready to give this money at a certain percentage. This percentage is called a coupon and is paid at regular intervals. The coupon can be fixed for a certain period (permanent coupon) or tied to some indicator such as the Central Bank rate or inflation (variable coupon).

“The transfer of money from the investor to the issuer is made in the form of a security with a certain maturity (there are also perpetual securities), at the end of which the issuer promises to return the initial amount (face value),” says “MK” the head of the DCM department of the corporate finance department “Tsifra broker » Maxim Chernega. The issuer can discuss the possibility of early redemption of securities at will or at the request of investors (offer). If the issuer borrows abroad in foreign currency, then such bonds are called Eurobonds (Eurobonds).

The combination of coupon payments and face value minus the initial cost of acquiring securities forms the investor’s return on the security, usually measured as a percentage per annum. Bonds can be sold or bought from current holders on the exchange or over-the-counter markets. The price is determined by current market conditions.

At the end of winter, increased trading activity was noted on the debt market. According to Cbonds, corporate bonds worth RUB 463.61 billion were placed in February. The volume of repayments was also a record for February – 295.52 billion rubles, according to Cbonds, Chernega added. According to him, the risks for Russian companies are growing, it is not clear what will happen next with the key rate of the Central Bank, with the economy of the Russian Federation and the world, but there is an excess of liquidity and more or less acceptable conditions. “External borrowings for domestic business have become unavailable, so they set records in the domestic market in terms of volume. The main issuers of bond placements in February were banks, as they need funds to increase lending,” said Vladimir Chernov, an analyst at Freedom Finance Global.

In addition to the increased volumes, the experts recorded other interesting trends. Chernov noted an increase in the number of issuance of corporate bonds in yuan with an annual coupon yield of 3-4%. In addition, the yields of high-yield bonds (HDOs) continue to decline — since the beginning of the year they have fallen by an average of 40 bp. and are below the values ​​of December 2021, Chernega emphasized.

Under the conditions of sanctions, it was necessary to transfer Russian Eurobonds to Russian jurisdiction. “A whole new segment has appeared – replacement bonds,” Evgeny Zhornist, portfolio manager at Alfa Capital Management Company, told MK.

Recently, the Ministry of Finance proposed issuing “patriotic” government bonds. They will be distributed through banks and financial platforms. There were similar loans in the USSR after the war, when money was collected for the restoration of the national economy. A decision on this initiative will be made at the end of March.

Due to the increased demand for precious metals, new products may appear. Thus, one of the Russian gold mining companies announced plans to issue bonds, the par value of which is tied to the cost of 1 gram of gold. Settlements during the initial placement, payment of coupon income and redemption will be made in rubles based on the discount price of the Central Bank for gold.

Another important event took place last week – the Bank of Russia left the key rate unchanged at 7.5%. This is an important indicator for the debt market: when the refinancing rate rises, bond yields rise by about the same amount, while their face value falls. This is due to the “adjustment” of profitability. “The rate of the Central Bank will most strongly affect the “short” securities of quality issuers. In the “medium” and “long” segments, its influence is no longer so obvious. There, rather, the dynamics are determined by expectations,” Zhornist added.

The second important factor for the securities market is liquidity: even with a relatively low rate of the Central Bank in the absence of free money, it is difficult for an issuer to place, and vice versa, with a high rate, but an excess of money, placements go without problems.

From the point of view of profitability, corporate bonds are currently the most attractive, Vladimir Chernov emphasized. At the same time, according to him, there are issues of fairly large and reliable companies, where the risks of default are minimal, and the yield is much higher than that of OFZ or replacement bonds. For example, now you can buy Rusnano bonds with maturity in March 2024 and an annual yield of 25%.

When choosing corporate bonds, it is important to pay attention to the credit quality of issuers, and not to chase yield at the expense of the quality of the bond, advises asset manager at BCS Mir Investments Ruslan Nikolenko. You also need to pay attention to the duration (from the English duration – “duration”. – “MK”) is the period of time until the full return on investment. Typically, long-term bonds bring a higher yield (risk payoff), while they are more sensitive to changes in interest rates – with their growth, the yield of long-term bonds increases faster. Now it is better to consider short bonds and bonds with a floating coupon, recommends Nikolenko. In Chernov’s opinion, it is worth building up positions in debt securities with a duration of more than three years only in OFZ, as corporate risks are too high.

Another subtle point is the risk of defaults. Let’s be honest: it always exists, it all depends on the credit quality of a particular issuer. During economic crises and geopolitical upheavals, risks increase. But today there are no clouds on the horizon on the Russian debt market. So you can forget about floaters (OFZ-PK, with a variable coupon) and linkers (OFZ-IN, linked to inflation). “These defensive tools perform well in a weak market. Now we are waiting for prices to rise, so protective papers are not in our focus now. We anchor securities of the 2nd and 3rd tiers, as their spreads to OFZs look excessive and for “long” OFZs based on the overall market growth,” Zhornist emphasized.

It is no secret that this year many Russian companies will have to refinance their loans and increase spending on investment programs as part of import substitution measures. In addition, according to analysts, in 2023 the Central Bank of the Russian Federation may raise the key refinancing rate by 50-100 bp, as inflation expectations remain high. Against this backdrop, bond yields will rise, and the rising cost of lending will force companies to issue even more bonds.

The total share of bonds in the investment portfolio depends on geopolitics, the economic situation in the world, as well as on the tolerance of each individual investor to risk and the goals of his portfolio. “In a portfolio that is formed as an addition to a pension or for the future education of a child, bonds can be from 50% to 100% of the share of all securities in the portfolio,” Nikolenko said.

All experts interviewed by MK are sure of one thing: at the moment, deposits in terms of profitability will clearly lose to bonds. Recall that last week, according to the Central Bank, the maximum interest rates on deposits were: for up to 90 days – 5.74%; for a period of 181 days to 1 year – 6.66%; over 1 year – 8.31%. The average market rates on deposits, of course, are even lower.

During acute crises, deposits always “beat” securities in terms of profitability. Remember how a year ago, after the start of the CBO, deposit rates soared and, on the contrary, stock indices sank. But during the period of stabilization of the situation, bonds, as a rule, look more interesting. Our economy has already adapted to the sanctions, so going to the stock exchange for securities looks very attractive.

In the “short” segment, Evgeny Zhornist prefers corporate bonds of the 2nd and 3rd tiers, and in the “long” segment, you can look at OFZ. In dollars, replacement bonds look promising, while yuan bonds look unattractive now. “You can also buy fairly high-quality securities with a maturity of 1 year and a yield of over 11%. There are no such rates in deposits. In general, in the event of an increase in prices in longer securities (which is likely with a decrease in inflation and expectations of a reduction in the key rate), one can count on a yield of 13–15% a year ahead,” the analyst concluded.