Substitution rates – Finance – Kommersant

Since mid-March, Russian issuers have resumed placements of yuan bonds. Despite the continuing interest in these securities, the yield of new issues amounted to 3.5-4.95% per annum, which exceeded the yield of similar placements last autumn by 0.5-1 percentage points. The rise in rates comes against the background of higher yields of replacement bonds, denominated mainly in dollars. Although further growth of yuan rates may continue, managers believe that it is inefficient to catch entry points, and to minimize interest rate risks, one should buy short bonds.

spring revival

After a two-month lull, corporate borrowers stepped up placements of bonds denominated in yuan. On March 15, Rosneft placed ten-year stock exchange papers with an offer in a year. Due to strong demand, the placement volume was increased from CNY 13.5 billion to CNY 15 billion. However, the final coupon target was set at the lower end of the initial range – 3.5% per annum. A week later, Sovcomflot placed three-year bonds with a coupon of 4.95% per annum (with an initial rate of 5.25% per annum). The placement volume was also increased from CNY 2 billion to CNY 2.6 billion.

At the same time, the established coupon rates turned out to be higher than last autumn. On September 7, Rosneft placed ten-year securities with a two-year offer with a coupon of 3.05% per annum. On the whole, on bonds of issuers of the first echelon on two-three-year bonds the coupon rates were 3.05-3.25% per annum, on four-five-year bonds – 3.7-3.95% per annum. These levels implied a premium of 1-1.5 percentage points to the yield of Chinese government bonds of the same maturity, although analysts estimated the fair premium to be much higher – 2.5-3.5 percentage points.

Growth bets

At the end of last year, “there was a seller’s market, and Russian issuers were placed below all fair levels in terms of profitability,” said Alexei Tretyakov, general director of Arikapital Management Company. At present, a buyer’s market has formed, “therefore, the benchmark for new placements is the yield levels of the secondary market in replacing Eurobonds and sovereign Eurobonds of the Russian Federation,” the expert notes.

According to Alexander Yermak, Chief Debt Markets Analyst at BC Region, the average market yield growth since the beginning of the year has been 34 bp. p. “Metalloinvest’s five-year bond yield increased by 62 basis points. p., up to 4.52% per annum. Bond yields of Metalloinvest, Rosneft, Rusal with a duration of 1.3–1.5 years rose by 62–68 bp. etc.,” the expert notes.

RMB yields are boosted by the active placement of replacement bonds, which are also seen as a potential defense against ruble devaluation.

“There is now a more interesting instrument for investors on the market than bonds in yuan, which are substitute bonds of Russian issuers with high credit quality. The yields of some issues maturing until 2026 exceed 8% per annum in the currency of unfriendly countries,” said Artem Autlev, an analyst at Ingosstrakh Investments.

As a result, the growth of yields on yuan bonds may continue, market participants believe. However, full equalization may not occur, since, unlike the dollar and the euro, the yuan is a friendly currency. In addition, as Maxim Vasilyev, chief analyst at Trinfico Management Company, notes, the difference in the key rates of the People’s Bank of China and the Fed widened in March to 1.1–1.35 percentage points, and the supply of replacement bonds on the market is much higher. . The latter, according to Mr. Tretyakov, may lead to lower rates on these securities.

Competitive substitution

To minimize interest rate risks, managers advise buying short securities. “The idea of ​​choosing an entry point for buying should be considered as a speculative approach,” says Maxim Vasiliev. Since the decline in the cost of debt securities in the future “is not so clear, since coupon payments on bonds can fully compensate or even exceed potential losses in a situation of rising market yields as a whole,” he notes. According to Mr. Vasiliev, the currency risk will be more significant, as it is tightly controlled by the People’s Bank of China. “The devaluation of the yuan was already used in the trade wars between China and the US during the presidency of Donald Trump.

Therefore, in addition to the obvious risks associated with the growth of the economy, the conduct of the monetary policy of the Central Bank of China and the growth of geopolitical tensions, one should always be prepared that the country’s leadership may moderately weaken the currency in the national interests,” Mr. Vasilyev notes.

It is also worth considering that not all yuan bond issues have high liquidity. According to Alexander Yermak, since the beginning of the year, the total volume of transactions in such securities amounted to about 725 million yuan (the equivalent of 7.7 billion rubles), or 1.1% of the total volume of bonds in circulation. The maximum transaction volumes were recorded with bonds of Polyus (almost CNY 200 million) and Rosneft (CNY 150 million). Less popular were the bonds of Segezha (76 million CNY) and the first issue of Rusal (67 million CNY). “The minimum volumes – about 1 million CNY – were held on the bonds of the IFC Fast Money and the EDB,” notes Mr. Yermak. At the same time, there have been no transactions with bonds of Norilsk Nickel and bonds of Rusal with a floating coupon yet.

Vitaly Gaidaev