Russian government debt takes hit
The news that the ECB had stepped into the market in order to support demand for Italian and Spanish sovereign issues, as expected brought yields tumbling on Monday morning.Italian 10 year bonds fell more than 60 bp to 5.40%, and Spanish 10 years shed 79 bp to 5.25%, well below the 6% at which both were trading for much of last week.But the prospect of German support for the ECB move saw the yield on 10 year Bunds climb.
Also as expected, the downgrade of U.S. debt by Standard & Poor’s, saw a flight to the relative safety of T-Bills, despite the downgrade, with the considerably more volatile global outlook leaving little alternatives as havens, which saw yields on U.S. 10 years fall
In Russia the turmoil on global markets and the currency volatility which has broken over the last week had local government debt players looking only at how big the selloff would be.With the Russian rouble posting its biggest one day loss against the bi currency basket since May last year to lose 77 kopecks, to make it a 4.5% loss over the last 5 sessions – the biggest in more than 2 years. That set the scene for government debt to decrease from 20 to 70 bp across the yield curve, with the 10 year down 43bp as the Yield to Maturity climbed to 7.82%, and the 6 year series down 70bp with the YtM rising to 7.67%.
Despite the ugly day’s trade analysts say the direct impact of events in the U.S. is fairly minimal, with the main drivers of the days selloff coming from currency movements.
Uralsib Capital analyst, Dmitry Dudkin says the capacity for Russia to service its borrowing needs domestically means it is to some extent protected.
“The U.S. market of for Treasuries is quite stable, so Russia’s market of sovereign debt can go down a bit, but this move won’t be deep. Also, Russia’s Ministry of Finance doesn’t have any huge deals planned with dollar denominated obligations in the near future, with maybe a Eurobond issue possible in 2012. I don’t think Russian economy will need to borrow soon, but even if it will, domestic market will be the main lender.”
Egor Fyodorov, Senior Credit Analyst at ING Bank Moscow also noted that the daily outcome reflected a fairly emotional day in debt markets, despite having had time to brace for the impact of the weekends announcements by the ECB and S&P, with stabilization likely on the short term, barring a major external shock.
“I don’t think Russian investors will change their strategies neither short nor long term. And most of other markets haven’t reacted heavily, except Asian bonds having gone down. First, it happened because investors were ready for such a scenario and took that into account working out their investment plans. And second there’s no much alternative to American treasuries for global investment funds. The markets have been very emotional, which is in their nature, in fact. But, I think, already by the end of this week the situation will have stabilized.”
Dudkin noted that the support for the Italian sovereign market, the worlds third largest, was potentially inflationary and could have an upside for Russia transmitted through commodity prices.
“Historically, Europe has always followed a moderate budget policy and supported a strong euro. So this ECB move was rather exceptional, and if the Bank continues buying Italy’s debt further, is in fact the World’s 3rd market of sovereign bonds, so it will add to inflation in the Eurozone. This in turn will drive commodity markets higher, most importantly for Russia – in oil. So, the overall effect for Russia could be quite positive. ”
Source ING: Bloomberg
Over the course of this year Russian government debt has been solid against a volatile global backdrop, with a decades worth of generally tight fiscal policy and strong oil revenues, backing Russia’s debt position.Uralsib’s Dudkin believes that despite the prospect of increased outlays over the course of the coming year, commitments to rein in the budget deficit will buoy debt markets.
“This years performance is mainly due to a balanced budget policy in Russia, with the Government keeping its expenses under control. But in 2012, the year of elections, military expenses and some social spending will go up. Anyway, according to Russia’s Finance Minister Alexey Kudrin, who is always conservative, the government debt won’t exceed 3% of GDP in 2012.”
That sentiment was echoed by ING’s Fedorov who noted “After the crisis in 1998 Russian authorities just put balancing the level of Government debt in focus and was pretty careful with budget spending,” adding that once the key immediate driver is the rouble, with a debt rebound when crude prices and the rouble stabilize.
“I think the negative price trend will follow the rouble on FX markets, but when the rouble and Brent crude stabilise it will be strong signal to buy.”