What is the return on investment in low-risk debt securities?

The tougher rhetoric of the representatives of the Bank of Russia affected the yields of sovereign and corporate bonds. At the same time, the strongest growth in rates is noted in the longest bonds, which are also under pressure from active borrowing by the Ministry of Finance. Depending on the investor’s risk appetite, it is worth taking into account the uncertainty in the run-up to the upcoming meetings, or choose securities and hold them to maturity, especially since market rates along the entire curve exceed deposit rates.

Yields are looking for a limit

Last week, the yield of the longest-term OFZ issue (due in May 2041) approached 11% per annum – on Friday it amounted to 10.98% per annum. This level was reached in September and April last year. Since the beginning of the week, it has grown by 8 basis points (b.p.), and since the beginning of the month – by 15 bp. At the same time, the growth has been almost continuous since the beginning of the year.

According to Alexander Yermak, Chief Debt Markets Analyst at BC Region, the longest-term bonds showed an average yield growth of 58 bps. p. (with a maximum increase of 80 bp for the longest issue). On average, OFZ-PD yields have grown by 41 bps since the beginning of the year. at the same time, on the shortest segment of the curve (up to one and a half years), the growth in rates amounted to an average of 45 bp. For issues with a maturity of 2 to 7 years, the increase averaged about 25 bp. P.

The main reason for the general increase in rates in the market was the tightening of the rhetoric of the Bank of Russia.

“At its pivotal meetings in February and April, the Central Bank first raised the trajectory of the key rate until the end of this year, and then clarified it, but at the same time, in order to reach the upper limit of the revised range, the increase in the key rate at the next meetings could total two percentage points,” notes Mr. Yermak.

A stronger increase in long-term OFZs is associated with the active placement of such securities by the Ministry of Finance. In less than six months, the ministry raised more than 1.5 trillion rubles on the open market, of which almost 0.9 trillion came from long-term OFZ-PD. At the same time, in order to increase the attractiveness of new bond issues, the issuer is forced to provide investors with a yield premium, which, according to Mr. Yermak, was reduced from 6–10 bp. p. at the beginning of the year to 3–4 bp in recent months, but may rise again to 5–7 bp. P.

With an eye on the regulator

Further movement of rates on the OFZ market will obviously depend on the aggressive actions of the Bank of Russia to raise the key rate and the rhetoric of subsequent statements. But already now, as Yury Tulinov, senior vice-president of the office of market research and strategy of Rosbank, notes, long-term government bonds offer a premium of more than 300 bp. p. to the key rate, so he does not expect a significant reaction in long-term securities.

In the case of a limited rate increase within 50-100 bp. from the current levels and more calm rhetoric of the regulator, it is possible that the rates will be lowered by the end of the year.

Under such conditions, according to Mr. Yermak, rates may drop to 10.5-10.75% per annum by the end of the year.

Despite the fact that the increase in the key rate is largely priced in by the market in the prices of medium- and long-term OFZs, the amplitude and speed of a possible tightening of the regulator’s monetary policy remain unknown variables, said Pavel Mitrofanov, portfolio manager at Sistema Capital. “Because of the uncertainty factor of changes in future inflation and the severity of the signal of the Central Bank of the Russian Federation at the July meeting, we are tactically cautious about investing in long-term government bonds,” he notes.

Risk game

In the case of private investors, the choice of securities should take into account risk appetite and investment horizon. With short-term investments (six months to a year), it is worth acting with caution and giving preference to securities up to two years, albeit less profitable. Such securities are usually less subject to fluctuations when the key rate changes.

According to Trinfico portfolio manager Yuri Grossman, a diversified portfolio of first and second tier corporate bonds by issuers and industries will provide a premium of up to 1 pp to OFZ yields with moderate credit risk.

However, it is worth remembering that corporate bonds, as a rule, are less liquid, which means that selling spreads can be widened.

In the medium term (from one to three years), you can get a yield to maturity similar to the previous option, while increasing its credit quality by buying longer OFZs instead of short corporate bonds, says Mr. Grossman.

Or with a similar credit quality, you can get a higher yield by “lengthening” the duration of the portfolio of corporate issuers. The yields of such securities react moderately to possible changes in the key rate. It will most strongly affect long-term securities, and therefore bonds of such maturity should be taken if you are ready to hold such securities for many years, ideally until maturity.

“Credit risk also increases with the investment period, so it is safer to give preference to government securities in this scenario,” Yury Grossman warns. According to him, regardless of the investment period, making a portfolio of securities with the same maturity will allow the investor to fix the current yield of the corresponding part of the curve with minimal market risk.

Vitaly Gaidaev