What prospects do replacement bonds of Russian issuers have?

The softening rhetoric of the US Federal Reserve System (FRS) led to a fall in US bond yields. However, this has little impact on the market for Russian replacement bonds issued to replace frozen Eurobonds. Against the background of the expanding supply of such securities and the entry of new issuers into the market, the yield of most of them remains in the region of 5–7% per annum. At the same time, in such investments one should take into account not only credit, but also currency risk associated with the possible strengthening of the Russian currency.

Easing rates

The Fed appears to completed current cycle of policy tightening. This was stated by the head of the American regulator, Jerome Powell, following the results of the December meeting that ended on December 13. At this meeting, as analysts expected, the rate was kept at 5.25–5.50%. At the same time, 17 out of 19 members of the Fed leadership did not rule out a lower rate by the end of 2024 than now. At the same time, the median forecast shows a reduction in the rate by 0.75 percentage points.

According to the chief analyst of Sovcombank, Mikhail Vasiliev, the American Central Bank will begin a cycle of reducing the key rate in March, and by the end of next year will reduce it by at least 150 basis points. p., up to 4%.

Under the current conditions, there was a strong drop in yields on the American debt market. On Friday, the yield on the five-year U.S. Treasury note stood at 3.89%, near its lowest level since early June, according to Investing.com. It has dropped by almost 34 basis points since the Fed meeting. The yield on ten-year government bonds (US Treasuries) fell slightly less (by 29 bp), which fell back to 3.92% per annum, the minimum since mid-August.

Local replacement

A reduction in the Fed rate and US government bond yields has a limited impact on the yields of Russian replacement bonds against the backdrop of a high supply of such securities from issuers.

According to the chief debt market analyst at BC Region, Alexander Ermak, there are currently almost five dozen issues of replacement bonds of 14 issuers in five currencies circulating on the market for a total amount equivalent to 1.7 trillion rubles. ($18.5 billion).

Most (35 issues) are published in US dollars. At the same time, only Gazprom Capital made eight issues in euros (but currently two more issuers are going to issue replacement bonds in European currency). Gazprom Capital also carried out one issue each in Swiss francs and British pounds (another issuer is preparing an issue in Swiss francs).

In the fall, Alfa Bank replaced two ruble Eurobond issues worth RUB 20.75 billion. “Currently, in the process of collecting applications, which are planned to be completed before the end of this year, there are five issues of replacement bonds from such issuers as Norilsk Nickel, State Transport Leasing Company, NLKM and Sovcombank,” notes Mr. Ermak. The total volume of Eurobonds is $2.4 billion.

The decision to place replacement bonds was made for another two dozen issues of such issuers as MKB, TMK, ChTPZ, HKF-bank, VTB, PIK Group, NLMK and SIBUR. The issues are prepared both in dollars and in euros, rubles and Swiss francs, and the total declared volume exceeds the equivalent of $9 billion. “There is not enough time to place these issues before the end of this year, but Russian issuers were allowed to extend the replacement of Eurobonds until July 1, 2024.” , notes Mr. Ermak.

Influential ruble

The new supply of substitute bonds (SO), according to Mikhail Vasiliev, will act as a limiting factor for the growth of quotes of these securities. Their yield, depending on the period of circulation and currency of issue, is 5–9% per annum. Therefore, investors still have the opportunity to purchase securities by fixing high rates on foreign exchange investments. Moreover, as the process of replacing Eurobonds is completed and the Fed’s monetary policy is easing, if it happens next year, the prices of such securities may rise.

“In 2024, securities denominated in dollars and euros will remain on trend and show positive dynamics, since the market consensus indicates the imminent start of a rate cut not only by the Fed, but also by the Bank of Russia,” notes the head of the bond department of the management company “ Ingosstrakh-Investments” Igor Kirillov.

When choosing securities, it is worth considering that payment of coupons and redemption of bonds are made in rubles at the Central Bank exchange rate.

An important parameter when choosing a security is its liquidity, which affects the ability to quickly buy or sell securities at an acceptable price. As Ivan Lavrinenko, Investment Director of LLC Management Company Era Investments, notes, the most liquid are the issues of Gazprom Capital with a yield in dollars ranging from 5.5% per annum for short periods to 6.8% per annum for long terms.

In such investments, it is worth considering not only credit, but also currency risks. According to Mikhail Vasiliev, in the first quarter of 2024, the dollar exchange rate may roll back to 87 rubles/$ against the background of a decrease in seasonal demand for currency. “Starting from the second quarter, we expect a moderate weakening of the ruble following a seasonal increase in demand for foreign currency and the likely cancellation of the decree on the mandatory sale of foreign currency earnings for the largest exporters,” the expert notes. According to his estimates, next year the average dollar exchange rate could be 95 rubles/$, the euro exchange rate – 104 rubles/€.

Vitaly Gaidaev