Moscow. December 30. The Russian Eurobond market after two years of decline in 2015 has significantly increased in price, reflecting the decrease in geopolitical risks and the growing interest of international investors to Russian assets, as well as a systematic reduction during the year in interest rates by the Bank of Russia. Experts “Interfax-CEA” note that the result of changes in the structure of holders of Eurobonds of Russia, in particular, growth in the share of local market participants by reducing the share of non-residents was the change in the market behaviour in General. Thus, despite the sharp drop in oil in late 2015, the decrease in quotations of the Russian Eurobonds was relatively small, which talked about the fact that domestic banks and companies are unwilling to actively sell previously purchased from the market paper. Thus, banks prefer to hold bonds on their balance sheets, in hopes to further their use as a reliable monetary asset for REPO transactions.
Negative the beginning of the year
By the end of 2015 the price of Russian Eurobonds with repayment in 2030 have grown by 14.8% and amounted to 120,02% of par (spread to a five-year US Treasuries narrowed during the year by 348 points and was 127 basis points). Eurobonds maturing in 2043 year rose in price for 12 months of 13.4% (the yield dropped by 95 points to 6.05% per annum), maturing in 2042 – 13% (the spread to US Treasuries of similar duration was narrowed down to 103 points and amounted to 354 basis points). Quotations of Eurobonds maturing in 2023 rose by 14.5% (the spread to US Treasuries has narrowed to 200 points to 255 basis points), maturing in 2020 is 11.3% (yield declined by 246 points to 4.15% per annum).
Despite the positive results, the dynamics of Russian Eurobonds in the beginning of 2015 was negative on the background of unstable situation on world capital markets and in anticipation of the decisions of the international rating agencies concerning the credit rating of Russia. The main reasons for the sharp decline of quotations of Russian Eurobonds was, on the one hand, the negative dynamics of the world prices for oil slipped near $60 per barrel of Brent, moved to a new psychologically level of $50 per barrel.
The market also pressured by expectations of a drop in Russia’s credit rating by international rating agencies. And these expectations were met – first, Fitch Ratings lowered the long-term Issuer default rating of the Russian Federation in national and foreign currencies from “BBB” to “BBB-” – the last stage of investment level, then a similar decision was made by the Moody’s Agency lowered the rating of Russian government bonds to “Baa3” from “Baa2”.
Towards the end of January, rating Agency Standard & Poor’s announced reduction of long-term and short-term ratings of the Russian Federation on liabilities in foreign currency to non-investment (speculative) level to “BB+/B ‘from’ BBB-/A-3”. Meanwhile, the ratings Outlook was kept negative.
The growth of the market amid the weakening of the oil and of the Minsk agreements
Only in February in the Russian sector of currency bonds began to form a tendency to increase due to the emerging rebound of global oil prices, the actions of global Central banks, as well as the gradual decrease in geopolitical risks after the signing of the Minsk agreements on Ukraine. The head of the European Central Bank (ECB) Mario Draghi announced asset purchases worth 60 billion euros per month starting from March until the end of September 2016. In addition, the ECB expectedly left unaltered by all three of base rate, including base rate (on loans) is at a record low of 0.05% per annum.
Active wave of growth swept across the market of currency bonds of the Russian Federation on 5 February, when market participants reacted waiting for a meeting of Russian President Vladimir Putin with the leaders of France and Germany in Moscow. Investors bought Russian assets in the hope that at the trilateral meeting in Moscow can be agreed on an action plan to overcome the crisis in Ukraine. In addition, activation of the domestic buyers of the Eurobonds contributed to a renewed rise of oil.
The most active growth in the market came on 12 February, when investors reacted to news of reached in Minsk the leaders of Russia, Ukraine, Germany and France (“channel four”) agreements on the settlement of the conflict in Ukraine.
A certain touch of nervousness made the decision of the international rating Agency Moody’s Investors Service reduced the rating of state bonds of the Russian Federation to the speculative level of “Ba1” from “Baa3”, citing worsening prospects of the Russian economy and the reduction in the financial capacity of the government. The rating forecast was left negative. Thus, of the big three rating agencies, only Fitch Ratings has maintained Russia a rating of investment grade (BBB -).
New wave of growth in foreign exchange bonds of Russia has caused the results of the meeting of the Federal reserve system of the USA, announced on 18 March, in particular, management’s assessment of the fed medium level of rates in 2015 has been reduced from 1,125% to 0.625% per annum. The decision of the American Central Bank not to rush to raise interest rates caused a marked rise in global stock and commodity markets, in particular, oil prices gained per day is 3-4%. Russian securities followed the American debt market, in the face of declining geopolitical risks, the growth of prices of domestic stocks was more abrupt, leading to significant narrowing of sovereign spreads.
Peak growth of the market of domestic Eurobonds fell for the first half of April, followed by the activation of sellers, which caused a negative adjustment of the market after the rapid growth observed since February. This, in particular, contributed to the decision of the Bank of Russia to raise rates on foreign exchange renancing Opera ons, including through auctions of foreign currency REPO. The regulator has taken this step due to the increased volume of speculative operations carry trade, which contributed to the excessive strengthening of the ruble.
Feature of April was the fact that the dynamics of the most liquid issue maturing in 2030 (this status was kept for this release until 2015) is very different from other editions of the dynamics of foreign currency government bonds of Russia. The fact that a significant part of the issue “Russia-30” has been redeemed from the market under the provision of operations foreign currency REPO, resulting in the release of lost liquidity, and its dynamics was not fully reflected in the market situation in General. This situation was maintained up to the end of the year.
Activation of the buyers of Russian foreign exchange bonds in the first half of may stimulated the expectations of improving us-Russian relations after meeting U.S. Secretary of state John Kerry with Russian foreign Minister Sergei Lavrov and Russian President Vladimir Putin in Sochi. Global investors have viewed the results of the meeting of Russian President Putin with us Secretary of state as constructive.
However already in second half of may in the market sellers became active, thanks in no small measure contributed to the actions of the Bank of Russia, which abolished the auctioning currency REPO for a period of 1 year, which led to a decrease in foreign currency liquidity. In turn, the publication in the U.S. positive statistics from the housing market has escalated with the decline of the American Treasury bonds (US Treasuries).
Summer fall Eurobonds at the background of the collapse in China
The trend in the decline of quotations in the foreign exchange sector of government bonds in Russia began to emerge in late may following the collapse of oil and US Treasuries (declining on fears of a possible imminent rate hike by the fed), as well as to the weakening of the ruble and sales by non-residents risk-weighted assets due to the risk that the outstanding issue that the Greek debt could lead to the collapse of the Eurozone. Fuel to the fire in early June added news about the worsening situation in the South-East of Ukraine.
The rebound of quotations of Russian Eurobonds took place on 18th of June, what was the market reaction to the outcome of the June meeting of the Committee on open markets FRS of the USA. At the meeting the us regulator had maintained the target range of the interest rate (0-0. 25% per annum) and indicated a slow increase in the cost of credit in the future. The head of the U.S. Central Bank Janet Yellen reiterated that she and her colleagues would like to see a more decisive confirmation of the economic recovery before making a momentous step, stressing that after the first increase of monetary policy the fed will be generally stimulating.
However, the announcement of the official results of the referendum in Greece (results of the public referendum on 5 July no suggestions of evrokreditory said 61,31% of voters, support was expressed 38,69% of referendum participants) increased among global investors fears of Greek default and its exit from the Eurozone. Against this background, prices for “black gold” plummeted downwards. The ensuing weakening of the ruble against the bi-currency basket also played into the hands of the sellers of Russian assets.
After lengthy negotiations, the leadership of Greece with the creditors, the President of the European Council Donald Tusk announced that the parties managed to reach agreement on reforms needed for the start of the discussion of the third programme of assistance to the country. The leaders of the Eurozone have completely eliminated the idea of providing a temporary failure of Athens from the single currency. The deputies of the Greek Parliament voted for the adoption of a package of austerity measures, doing the conditions of creditors. Thus, opening the way for the resumption of the financing of Greece by the ECB and the IMF.
Considerable falling of the Russian Eurobonds took place on 27 July, prompted General negative conditions in global capital markets because of the strong collapse in China, where the Shanghai Composite stock index fell by 8.5%, the biggest drop since February 2007.
A new crash of world markets was recorded less than a month later – on August 24. Amid the panic that has engulfed without exception, global markets, falling share prices of the individual releases of the Russian Eurobonds exceeded 200 basis points, and growth yield was 20 basis points. Oil prices fell after China’s stock market – the second largest oil consumer after the USA again fell by 8.5%. October futures for Brent crude on London exchange fell by more than 5%, having fallen to $43 per barrel. In the currency market, the ruble has demonstrated a dramatic impairment losses, falling 3.7% against the US dollar and 3% against the bi-currency basket.
However on August 25 the situation on the world markets began to slowly stabilize and the world price of oil rebounded from the lowest in the last few years levels, with a positive impact on the dynamics of Russian Eurobonds, which by the end of the day almost completely won back falling of the “black Monday”. Global investors agreed that the fall of key assets wore too much the character and the background correction of the domestic oil paper failed to significantly grow.
To stabilize the situation on the stock market the people’s Bank of China at the end of August had surgery short-term financing via banks 6-day loans in RMB in excess of $20 billion was also Released weekly statistics on oil reserves in the U.S., demonstrated a sharp decline in reserves of oil (5.4 million barrels) in spite of the projected growth rate. The rapid recovery in oil prices has not gone unnoticed by the Russian debt market. Now the growth of quotations of separate issues of Eurobonds of the Russian Federation reached 350-400 basis points, but yields of these releases, respectively, decreased by 30-40 basis points.
In addition, support for the government bonds of countries in the category of emerging markets, including Russia, had reduced fears of an early interest rate hike by the Federal reserve system of the USA. At the September meeting of the U.S. Federal reserve, as expected, kept its base interest rate at the previous level, i.e. in the range of 0-0. 25% per annum.
In further support of the sector of domestic Eurobonds have any expectation of performance of the Russian President Vladimir Putin at the UN General Assembly and his meeting with U.S. President Barack Obama. Reacted positively to the market and news about what the U.S. and Russia came to a common understanding of the basic principles relating to the resolution of the Syrian problem. The Russian air force in late September, began conducting air operations in Syria and began carrying out strikes on ground targets of the Islamic state (ISIS).
In the autumn there was a noticeable decline in geopolitical risks on the background of stabilization of the situation in southeastern Ukraine, especially after the meeting “channel four” (Russia, Ukraine, Germany and France) in Paris. This factor was used most of the investors have stepped up purchases of Russian assets, both currency and ruble. The latter provided some support for the ruble, the reduction of which in the second half of the year has not been as rapid as the world prices for oil.
In addition, as stated by the Director of sovereign ratings Agency Standard & Poor’s Moritz Kraemer in an interview with Bloomberg, the anti-terrorist operation in Syria could be key to lifting the sanctions imposed against Russia by Western countries. He noted that the positions of Russia and the West on Syria is still different. Earlier in an interview with Bloomberg, Kremer said that cooperation of Russia with the USA and European Union in the fight against international terrorism could expedite the lifting of sanctions with Russia.
Support global capital markets, including Russian Eurobonds, had the announcements of the European Central Bank plans to expand in December, the economic stimulus program (QE) in the Eurozone. The ECB left interest rates unchanged (at 0.05% per annum), in line with expectations, however, the head of the regulator Mario Draghi said that the ECB will review the volume incentive program in December (the regulator may revise the amount as the current program of quantitative easing QE, and the composition of the redeemed under this program, assets, and expiration date).
Another positive factor for risky assets was the decision of the people’s Bank of China to lower key interest rates and reserve requirement ratios for banks. Annual rate on loans was lowered by 25 basis points – with 4,60% to 4.35% per annum, on the annual Deposit also by 25 basis points, from 1.75% to 1.5% per annum. Since November of last year, the cost of lending in China fell for the sixth time, the previous change was held in late August. Reserve requirements for all banks have been reduced by 50 basis points from 18% to 17.5%. In addition, individual credit institutions may be eligible for additional reduction of the ratio by another 50 basis points. These standards in 2015 declined three times already. The changes came into force on 24 October.
Negative correction at the end of the year
On global capital markets in late fall are growing fears about a possible early increase in US interest rates. The main downward movement of Russian Eurobonds took place on 6 and 9 November, when market participants reacted to the drop in US Treasuries that occurred after the publication of strong statistics from the American labour market. The Federal reserve has repeatedly stressed that statistics from the labour market are a crucial factor when making decisions about changing the basic interest rates in the country. Estimation of probability of rate increase by the fed before the end of this year, jumped after the publication of data from 56% to over 70%.
The pressure on the Russian Eurobonds have had, and the observed instability in commodity markets – prices for oil and metals declined on fears of a further slowdown of the Chinese economy, which in recent years has determined the level of demand for raw material resources. In particular, copper, which is a barometer of economic conditions, declined by 12 November to the lowest level since 2009. Not pleased investors and published in China economic data, which were worse than analysts ‘ expectations. Thus, the growth of industrial production in China slowed in October to 5.6% yoy from 5.7% in September, returning to the level of January-March this year, which was the weakest since the 2008 financial crisis. Economists surveyed by Bloomberg on average predicted a rise of 5.8%.
At the end of November at the Russian Eurobond market has formed a new wave reduction, especially the “long” securities. Market participants reacted to the increase in geopolitical risks for Turkey shot down a Russian military plane in Syria. This incident provoked a strong reaction from the Russian authorities. The President of Russia Vladimir Putin declared that the Turkish air force attack on the Russian plane was “a stab in the back” by the “supporters of terrorists”, adding that the incident will have serious consequences for Russian-Turkish relations. Russian front-line bomber su-24 was shot down over Syrian territory by Turkish fighter F-16 and fell in Syrian territory, Putin said. According to him, the plane was at a distance of one kilometer from the border with Turkey and “fell four kilometers from the border”.
According to analysts, in General, the sector of currency bonds Russia has experienced fairly steady growth after geopolitical tensions in Syria downed Russian aircraft. In bygone days on similar negative background, the downside would be more pronounced, and now the market was quite strong, largely due to the fact that it lost its liquidity (large volume of the papers redeemed from the market and acts as collateral).
A record drop of oil at the end of the year was caused by the decision of the Organization of countries-exporters of oil (OPEC) on retaining the actual production of about 31.5 million barrels a day. The members of the cartel agreed not to set quotas before its next meeting in June 2016. The decision taken by OPEC on December 4, means that “everyone can do what I want”, said the Minister of oil of Iran Bijan Zanganeh assessing the excess supply in the market at $2 million.
As a result of the February futures for oil of mark Brent fell on 21 December to $36,35 per barrel, its lowest point at the close of trading on July 5, 2004 (during the session the price dropped to $36,04 per barrel). Quotes of the February futures on WTI oil declined to $35,81 per barrel on fears of growth of fuel supply to the global market, which is experiencing a significant oversupply.
However, global markets reacted positively to the December meeting of the US Federal reserve. The American Central Bank, its relatively mild decision to raise the interest rate by only 25 basis points and claims that a tightening of monetary policy will be gradual and cautious, boosted the demand for virtually all risky assets, including Russian Eurobonds. Following the meeting of the Federal open market Committee (FOMC) on December 15-16, the target range of the basic interest rate was raised for the first time since June 2006, by 25 basis points to 0.25 to 0.5 percent, in line with market expectations. To this basic rate remained at an unprecedented low of 0-0. 25% in the past seven years, since December 2008. In 2008, the rate dropped 7 times.