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Posted on April 25, 2011
Russia is seeking to bolster the appeal of variable-rate bonds, a market less than 3 percent the size of Brazil, by introducing a gauge of floating rates as investors look for protection against rising borrowing costs.
The National Foreign Exchange Association debuted ROISfix on April 15, an average of the rates nine banks are extending for interest-rate swaps based on the lender-backed body’s Ruonia rate. ROISfix will provide a transparent benchmark for both bond issuers and investors, according to Kirill Vergunov, the central bank’s head of domestic market operations, according to data compiled by Bloomberg.
Bank Rossii doesn’t target one benchmark interest rate and until the introduction of Ruonia in September, its chief interbank rate was one based on transactions compiled by the lenders themselves. As a result, 14 of the 1,228 bonds issued by Russian companies and governments have floating borrowing costs tied to external rates, compared with 558 of Brazil’s 1,877 outstanding bonds, data compiled by Bloomberg show.
“Russia is still like a teenager when it comes to financial markets and the wide diversity of policy rates is confusing to investors,” Luis Costa, an emerging markets strategist at Citigroup Inc. said by phone from London on April 21. “Once the rates market becomes more believable and the process with which rates are formed is more understood by the marketplace then people will be more confident trading instruments related to this rate.”
The ROISfix gauge will allow companies and investors to bet on and hedge the course of Ruonia, the average rate 31 lenders in Russia charge each other for unsecured ruble debt, Bank Rossii’s Vergunov said in an interview April 21.
The rate may be a good peg for floating-rate bonds as it has the backing of the central bank and, like Ruonia, will be based on verified transactions from banks, Roman Sulzhyk, head of rates trading at Deutsche Bank AG in Moscow, which is one of the nine lenders providing data for ROISfix, said April 21.
Of Russia’s 14 floating-rate bonds, nine are tied to the London Interbank Offered Rate, known as Libor, the U.S. Libor rate or EURIBOR, the interbank rate for the euro region, according to data compiled by Bloomberg. Two notes are tied to central bank policy rates, and one to Russia’s annual inflation rate. Two bonds have interest rates set to the three-month MosPrime interbank lending rate.
Ruonia is modeled on the EONIA rate, which is the average of all overnight unsecured lending transactions between contributing banks in the euro region. MosPrime is like Libor, the average of the rates banks say they charge to lend money to each other overnight.
“It is much easier for a corporate to hedge a ROISfix or MosPrime-based bond with a swap than to hedge a non-market rate,” said Sulzhyk, who predicts there would be demand for bonds with interest rates tied to the three-month ROISfix rate. “The move to floating-rate bonds will be gradual and a process of market education, the culture of the market needs to evolve.”
Bank Rossii raised its main interest rates from record lows in February, lifting its refinancing rate for the first time since 2008 after inflation accelerated to more than 9 percent this year. The central bank will probably increase the rate another 0.5 percentage points by the end of June after a 0.25 percentage point increase in February, according to the median of 16 economists’ estimates in a March 25 survey. Inflation was 9.5 percent in March, more than the central banks’ target of 6 to 7 percent this year.
Brazil lifted its target Selic rate six times in the past year, most recently by 0.25 percentage point on April 20 to 12 percent as the central bank strives to reign in 6.3 percent inflation, the fastest for more than two years.
The most rate increases in a 12-month period for six years have boosted the appeal of Brazilian floaters, with the total return on 2015 government debt linked to the Selic rate at 6.4 percent in the past year, compared with a negative return of minus 1.4 percent on similar-maturity fixed-rate bonds, according to data compiled by Bloomberg.
In Russia, OAO Transneft’s ruble notes due in 2019 tied to Bank Rossii’s one-year repurchase rate, have climbed 5.3 percent this year. Similar-maturity fixed-rate debt issued by Russia’s pipeline operator is little changed.
OAO Gazprombank’s bonds due in October with a coupon rate tied to the three-month MosPrime rate have declined 2.6 percent this year, while the price of similar-maturity fixed-rate debt issued by the banking arm of Russia’s gas export monopoly has dropped 1.9 percent.
Floating-rate debt may help lenders manage interest-rate exposure, Herbert Moos, deputy chairman and chief financial officer of VTB Group, Russia’s second-largest bank, said in an April 13 interview.
Still, the market for so-called floaters is “constrained by the types of investors that we have,” Moos said. “There is a natural appetite from investors for fixed rates because we’re often dealing with pension funds, insurers, that are in for the long-term.”
The nation’s reputation as a high-inflation economy with volatile interest rates also reduces the appeal of floating-rate debt, Moos said. ROISfix “needs to be a real living benchmark before it starts to be used, it will take time.”
Russia’s interest rates fluctuate more than Brazil and India’s, with 100-day volatility on the country’s two-year interest-rate swaps at 16.9 percent today, compared with 13.2 percent on Brazilian swaps and 10.7 percent on Indian swaps, Bloomberg data show. China has the most volatile rates of the countries known together as the BRICs, with 100-day volatility at 27.9 percent on two-year interest-rate swaps.
The ruble strengthened 0.5 percent to 27.8787 per dollar by 2:38 p.m. in Moscow, heading for its strongest closing level since December 2008. Non-deliverable forwards, which provide a guide to currency expectations and interest-rate movements allowing companies to hedge risk, showed the ruble at 28.1028 per dollar in three months.
The yield on the government’s ruble Eurobond due 2018 fell 29 basis points on April 21, last time it traded, to 6.716 percent, the lowest since it was sold in February. Russia’s 2020 dollar bonds rose, pushing the yield three basis points lower to 4.882 percent.
The cost of protecting Russian debt against non-payment for five years using credit-default swaps ended the week little changed at 130 on April 21, down from 177 on Nov. 30, according to data provider CMA. Russia is rated Baa1 by Moody’s Investors Service, its third-lowest investment grade rating.
The swaps cost 22 basis points less than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 22 basis points more on Nov. 29.
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries was unchanged at 178, according to JPMorgan Chase & Co.’s EMBI+ indexes. The difference compares with 135 for debt of similarly rated Mexico and 176 for Brazil, which is rated two steps lower at Baa3 by Moody’s Investors Service.
The yield spread on Russian bonds narrowed three basis points in the week to 87 basis points below the average for emerging markets, down from a 15-month high of 105 in February 2010, according to JPMorgan Indexes.
Bonds linked to official rates or consumer prices make up more than 60 percent of the Brazilian local-currency debt market, according to data from the Treasury. Fixed-rate real- denominated bonds accounted for 36.7 percent of total outstanding debt of 1.5 trillion reais, while inflation-linked bonds made up 28.4 percent.
Floating-rate securities with interest tied to the Brazil Cetip Interbank Deposit Rate, represented 33.3 percent. This rate should provide a model for the development of Ruonia and ROISfix, said Citigroup’s Costa, who grew up in Brasilia.
“Foreign investors don’t trust the local rates” in Russia, he said. “The faster they make this market mature the better.”
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