Forecast for the OFZ and corporate bond market for 2024

In 2024, the Bank of Russia may begin easing monetary policy. According to analysts, the key rate could be reduced to 9–12% if inflation begins to decline in response to the rate increase that has already occurred. In such conditions, the OFZ yield may drop to 10–10.5% per annum. At the same time, analysts advise maintaining a high proportion of the portfolio in floating rate bonds, as uncertainty in the market remains elevated.

Key Question

The determining factors for the Russian debt market will be the level of inflation and the actions of the Bank of Russia. The head of the Central Bank, Elvira Nabiullina, following the December meeting of the board of directors, noted that the regulator’s policy in 2024 will largely depend on what happens to the stable components of inflation. According to the latest data from the Ministry of Economic Development, annual inflation in Russia as of December 25 accelerated to 7.59% from 7.48% a week earlier. This is noticeably higher than the Central Bank target level (4%).

However, analysts interviewed by Kommersant believe that the measures taken by the Bank of Russia will be sufficient to stabilize the situation with inflation in the first half of 2024.

And already in the second half of the year it may begin to decline. PSB Banking and Financial Market Analysis Manager Dmitry Gritskevich notes that in the base economic development scenario, by the end of this year, the CPI increase in annual terms will be about 5.5–6%. “If inflation pressure decreases at the beginning of the year, the Bank of Russia will be able to begin reducing the key rate in the first half of 2024,” says Sofya Donets, chief economist for Russia and the CIS+ at Renaissance Capital. In the base scenario, it envisages a reduction in the key rate of up to 9% by the end of the year. Dmitry Gritskevich sees it at 12%.

Better half

Therefore, in the first half of the year, market participants do not expect strong changes in prices on the debt market, that is, OFZ yields will be in the range of 11.5–12% per annum. When the first signs of inflation stabilization appear and the Central Bank signals about the start of a rate cut, one can expect a decrease in government bond yields, followed by a decline in corporate bond yields. “By the end of the year, the curve will most likely shift to the range of 10–10.5% per annum,” estimates Dmitry Gritskevich.

In such conditions, we can expect a revival in the primary market not only of government bonds, but also of corporate bonds. As Alexey Bulgakov, head of the debt market analytics department at Renaissance Capital, notes, delayed supply from the period of high rates will come to the market. “Companies will be looking for money for development, therefore, bonds will remain an alternative to bank lending. Don’t forget about the serious marketing efforts that the regulator, organizers and infrastructure are making to promote bonds,” notes Maxim Chernega, head of the DCM department of the corporate finance department at Digital Broker.

Issuers will become more willing to offer securities with a circulation period of over three years, whereas at the end of last year they mainly placed shorter-term issues. “This will make the cost of long-term borrowing more attractive for issuers,” explains Dmitry Nikonov, head of the investment analysis department of Sovcombank.

Floating approach

Although current government bond yields are inferior to deposit rates, which even for large banks often exceed 15% per annum, they are usually available for periods of one month to six months, while bonds allow rates to be fixed over a horizon of more than five years. In addition, if the key rate is reduced, the bonds will rise in price and investors will receive a positive revaluation. “Due to the increase in quotations, the gross yield of medium-term OFZs in this scenario could be 16–18% per annum, ten-year bonds – 20–23% per annum,” estimates Dmitry Gritskevich.

At the same time, analysts believe that the basis of a private investor’s bond portfolio should still be government and corporate bonds with a floating coupon.

Such floater securities were popular among investors last fall against the backdrop of a rise in the key rate, since the size of their coupon depends either on the size of the RUONIA rate (indicative rate of overnight ruble loans) or other money market indicators, including the key rate .

Analysts’ caution is associated with ongoing pro-inflationary risks, including a soft budget policy due to high military and social spending, which will not be reduced on the eve of the Russian presidential elections, as well as record low unemployment and the structural transformation of the Russian economy due to Western sanctions. “We don’t expect any improvement in the labor market in the coming quarters. The shortage of personnel in the labor market will continue to put upward pressure on wages and inflation,” notes Sovcombank chief analyst Mikhail Vasiliev.

The Fed is not a decree

At the same time, the monetary policy of the world’s central banks, led by the Federal Reserve and the ECB, will have a limited impact on the Russian debt market, not only in terms of ruble bonds, but also foreign currency bonds. At the same time, analysts also expect them to ease monetary policy. Following the December meeting, at which the rate remained at 5.25–5.5%, FOMC members for the first time since March 2021 did not consider the option of further raising rates, but concluded that a reduction in the interest rate is “very likely” in 2024- m. The first reduction is expected in the first quarter of 2024. The ECB is not yet considering this possibility, but, like the Fed, it has not changed the rate for two meetings in a row, keeping it at 4.5%.

Of greater importance for the domestic market of foreign currency bonds, namely yuan and replacement bonds, is the demand for such instruments in the context of the weakness of the Russian currency.

The yield on such bonds, depending on the maturity period and currency of issue, is 4–9% per annum. Replacement bonds are more profitable, liquid and diverse. In addition, they are one of the few forms of investment in dollars and euros without the risk of sanctions blocking, since their circulation uses only Russian infrastructure, and payments are made in rubles.

Bond variety

However, the yield of such bonds is also affected by the expanding supply. As Dmitry Nikonov notes, many Eurobond issues could be purchased by investors abroad at a significant discount to the levels that were formed within Russia. Upon replacement, such investors have a significant incentive to take profits and are willing to sell at a yield premium to other replacement issues.

In 2024, analysts do not exclude a more active growth in the number of issues in the yuan bond segment, as well as the appearance of bonds in other friendly currencies. This will be facilitated by the further reorientation of foreign economic activity participants towards friendly countries. “At the current level of ruble yields, issuing bonds in foreign currency allows for significant savings on interest. The disadvantage of such issues is the possible weakening of the ruble and, as a consequence, an increase in the volume of this debt in terms of national currency,” notes Dmitry Nikonov. He does not rule out new placements not only in yuan, but in dirhams and rupees. Turkish lira are unlikely to be of interest to issuers due to the high level of rates. “Replacement bonds and foreign currency bonds in yuan must be kept in the portfolio to hedge currency risk,” notes Dmitry Gritskevich.

Vitaly Gaidaev