The Daily Update - Russian Eurobonds

The rumour mill suggests that Russia is looking to issue Eurobonds this month; as part of the total USD 3bn debt issuance that Finance Minister Anton Siluanov said could be issued this year. This comes off the back of S&P's one notch upgrade to the country’s long-term rating, to BBB-, bringing it in line with Fitch’s rating; thus the country is now eligible for inclusion in most global investment grade bond indexes so strong demand is expected.

It appears the country wishes to launch the bonds as soon as possible, despite having issued in the second quarter over recent years. There are a couple reasons why Russia may look to issue within the next couple weeks, first the Fed are expected to hike rates on March, 21, so launching ahead could keep borrowing costs lower; although markets have clearly priced in a Fed rate hike this month. Second, as at the end of February US Treasury Secretary Steven Mnuchin warned at a UCLA speech that Russia “can expect sanctions… in the next 30 days”; this comes despite the Treasury report earlier this year saying no further sanctions are expected to be added at this time. Although current western sanctions do not extend to government bonds, it might be worth drumming up demand ahead of any sanction announcements.

Despite the yield premium to the US Treasury curve at close to all-time lows, the current Russian benchmark curve offers relatively attractive yields, especially to those yield-starved investors; USD 10-year yields are trading at ~4.40% while the 30-year offers a yield of ~5.1%. Following concerns over further sanctions, last year President Putin stated that local investors will get first dibs on foreign currency bonds issued this year as a “convenient mechanism to bring capital back into Russian jurisdiction”; having sufficient foreign participation is key to maintaining liquidity in these issues, however.

Unless the bonds offer attractive risk-adjusted returns and sufficient notch cushion, we will not look to add to our portfolios. As such, the bonds will need to be issued at much wider spreads than the current benchmark curve; the USD benchmark 30-year, for example, is currently trading one notch expensive according to our RVM.

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