Even plunging oil prices and threats of new sanctions from Washington haven’t curbed foreign investors’ craving for Russian debt.
Money managers at Aberdeen Asset Management Plc and M&G Ltd are maintaining overweight positions in the country’s ruble government bonds and betting yields will retreat for a third consecutive quarter. Even after oil’s slide into a bear market and the possibility of fresh sanctions pummeled Russian assets in June, both say the appeal of yields more than three times the rate on U.S. Treasuries is enough to offset the risks.
“Many people still see Russia as an attractive macro story,” said Viktor Szabo, a London-based money manager at Aberdeen, who says the yield on Russia’s 10-year notes could drop to 7 percent, more than 60 basis points lower than current levels. “We have a positive outlook. The risk premium has room to narrow.”
Russian policy makers have won a seal of approval from foreign bond investors this year by reining in inflation while reducing interest rates only gradually. Aberdeen and M&G’s bullishness pits them against analysts at Morgan Stanley, who recommended reducing exposure to Russian government bonds because of a concern that spreads have little room to compress further with oil-market risk rising.
Yields on Russian 10-year government notes have dropped 73 basis points to 7.66 percent this year, handing investors a return in dollar terms of 9 percent, compared with 6.2 percent for an index of developing-nation bonds. Those earnings have been crimped by the ruble’s 4.3 percent tumble this month, which made it the worst-performing currency in emerging markets.
The U.S. Senate voted this month to allow for new sanctions on Russian state-owned entities in response to allegations of Russian meddling in presidential elections won by Donald Trump in November. The bill, which is currently being considered by the House, doesn’t include restrictions on sovereign debt or derivatives, but orders a report on what impact such limits might have.
The prospect of sanctions could spook foreign investors, curbing demand for bonds at a time when the government needs to borrow more money to cover a budget deficit from the drop in oil revenue, according to Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow. Demand for the Finance Ministry’s regular auctions of ruble securities, known as OFZs, has tapered after foreign investors bought a record amount in the first quarter.
“The third quarter could prove to be the most difficult for OFZs this year,” Losev said.
M&G money manager Claudia Calich isn’t concerned by sanctions. Restricting foreigners from buying government debt would be a very unlikely “nuclear option” for the U.S., she said. Calich, who helps oversee $1.2 billion of emerging-market assets, is betting yields will drop as much as a full percentage point by the end of the year as investors continue to be drawn to the high rates on offer.
“If yields move sideways, you are still looking at a decent return if we don’t have too much currency volatility and if inflation is trending lower,” she said. “We are maintaining our overweight position for the time being.”
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