Headwinds mounting for Russia’s bond market
November 11 2017 01:16 AM


The good times are drawing to a close for one of this year’s best-performing sovereign bond markets.
Analysts at Societe Generale SA and UniCredit Bank AG have published research notes this week warning that headwinds are rising for rouble bonds, or OFZs, after they returned 14% this year. GAM Holding AG, one of the biggest investors in Russian local-currency debt, is considering reducing its overweight position, according to London-based fund manager Paul McNamara.
“It’s both funny and sad at times how fast tables can turn these days,” Societe Generale analysts Yury Tulinov and Phoenix Kalen wrote in a note published November 7. 
“How in a matter of weeks the OFZ market can make a U-turn from the full rock’n’roll mode to desperate attempts to find any reasons to cheer on.”
The analysts warn that more pain is in store for rouble-based assets even as Brent crude trades above $60 per barrel. The currency has underperformed its emerging-market peers this month after the Finance Ministry announced it would step up purchases of foreign currency in November. 
Yields on 10-year government debt have climbed to 7.63% since reaching a five-month low in mid-October. 
Here are some of the biggest hurdles bondholders face:
Auction flop: The finance ministry failed to sell all of the rouble bonds offered in its weekly auction on Wednesday, only the second time that’s happened in the past four months. 
A 15 basis-point premium offered at the second auction wasn’t enough to stir up demand, according to analysts at Rosbank PJSC, SocGen’s local unit. 
The results may be a sign of waning interest toward Russian local debt, they wrote in note published on Thursday.
Dollar payments due: Russia has to make $16bn of external debt payments in December, a similar volume to July, according to analysts at UniCredit. 
That month, the currency underperformed its emerging-market peers, sliding 1.4%. Demand for dollars to make the December payments could put the rouble under pressure, the analysts said.
Profit taking: Dollar-based investors, who have made a 10.5% return from investing in rouble assets this year due to Russia’s high real interest rates, may start to take profits going into the end of the year, according to analysts at Societe Generale. 
Fund flows have slowed into a BlackRock ETF that tracks emerging-market local-currency bonds, including OFZs.
Sanctions threat: Investors are growing uneasy before a report by the US Treasury, due next quarter, on the possible effect of sanctioning Russian sovereign debt. Such a move would sap demand for rouble debt, a third of which is currently owned by foreigners, according to central bank data. 
The cost of insuring Russian sovereign bonds against default through five-year credit-default swaps has climbed this month after it reached the lowest level in more than four years on October 30.

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