Russia’s Ministry of Finance has placed a record number of ruble-denominated OFZ treasury bills in the second quarter of this year, bringing the total outstanding to RUB8 trillion ($126.8bn) as foreign investors increased their share again to 27.8% of the total outstanding, Vedomosti reported on June 27.
The second quarter has been extremely successful for the Ministry of Finance. At the latest auction on June 26 the ministry placed RUB18.4bn of OFZ bonds, the workhorse bond used to finance the government’s spending, to bring the total for the quarter to RUB888bn – a record amount for placements in one quarter, the ministry said. Taking into account redemptions this year, the ministry has already borrowed RUB950bn, or 70% more than for the whole of 2018, while the total volume of bonds issued since January is RUB1.4 trillion.
The enthusiasm for Russian domestic issued paper has seen a dramatic turnaround. Last year’s sanctions fears saw a dramatic sell-off with foreign investors dumping some RUB500bn of OFZ bonds and reducing their share from a record 34% set in April to around 25% by the end of the year. However, as this year got underway and it became clear the US Federal Reserve bank would not only halt its monetary tightening policy, but may even reverse it, enthusiasm for the high yielding Russian bonds returned. After a slight wobble in March, the share and volume of bonds foreigners have been buying has risen quickly.
The ministry has now already exceeded its quarterly borrowing programme plan by almost one and a half times: the plan called for the placement of a total of RUB600bn in the second quarter, but the ministry has been taking advantage of the positive market sentiment to build up reserves. Foreign investors bought just over half of all the OFZs issued in the first quarter of this year. By June 1, non-residents' share in the OFZs was close to RUB2.5 trillion – another historic high, according to Central Bank of Russia (CBR).
A similar enthusiasm for Russian fixed income obligations has been seen on the international markets where the ministry successfully tapped the market a second time this year in June with a dual tranche maturing in 2029 and 2035 with 4% and 4.45% yields, respectively. Prior to that the ministry made highly successful twin issues of $3bn and €750mn in the first quarter.
As bne IntelliNews reported in its June “CEE monthly bond wrap”, bond issues in CEE were sharply down in May, but sharply up in Russia, partly due to a low base effect from the sanctions-ridden 2018. And the Ministry of Finance recently suggested that it may tap the capital markets again later in this year.
With over $500bn in gross international reserves (GIR) and a triple surplus of trade, federal budget and current account, the ministry doesn't actually need the money, however, commentators have suggested the flurry of bond issues are designed to make it more difficult to sanction Russia’s sovereign debt as the more widely the bonds are held by foreign investors the more pain will boomerang back on the US if it bans investors from owning or trading in Russian fixed income.
The enthusiasm for Russian bonds is also seen in the yields, which have fallen from over 9% in 2018 to under 8% now – still a handsome return in a world of near-zero yields for most developed market bonds.
Replete with funds, the ministry has recently started to slow bonds sales. In the most recent auction the ministry met 92% of bids and has been forcing down the yield bid. A placement of 11-year OFZs worth RUB20bn was offered, generating a demand of RUB46.6bn with a weighted average yield of just 7.46% per annum.
One of the side effects of the bond rally is OFZs are now for the first time ever yielding less than equity dividend yields, which have risen to a record 7.9% after Gazprom decided to double its dividend payout in May.
And more buying is expected as the CBR is expected to cut rates at least one more time this year as inflation pressures have turned out to be lower than anticipated. On June 14, for the first time in a year, the central bank lowered the key rate by 25bp to 7.5% and is expected to cut again in the autumn.
In the second half of this year the Ministry of Finance plans to attract another RUB700bn–RUB900bn, depending on market conditions and how the budget is performing. After returning a 2.3% budget surplus in 2018 – the first positive result for several years – the budget plan for this year is a 1.9% surplus, which currently looks easy to achieve.
Achieving the goals in the borrowing plan for the second half of the year also looks easy as the ministry can cut the amount of bonds offered at auction in the first half of the year by 50% and still hit the target. The ministry has been offering around RUB60bn a week in the first six months, but only needs to offer RUB25bn-RUB30bn in the second half of the year to make the plan, according to VTB Capital analysts .
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