Since the Fed raised interest rates in December 2015 for the first time since June 2006, investors have been watching the bond market, fearing that spreads between companies and governments will widen.
Zhitong Financial APP found that emerging market bonds rebounded sharply during this period, thanks to the dovish policy of the Federal Reserve. Bond prices are clearly capped and everyone is waiting for the bubble to burst because higher interest rates could mean that emerging market companies may not be able to repay debt issued in dollars.
Everyone is waiting, but the bubble has not burst, and emerging market companies have not defaulted because the Fed has become hawkish, mainly because of commodity price volatility and geopolitical tensions.
In a world where it is extremely difficult to find value and bonds are mostly issued at negative yields, it is not difficult to believe that investors will consider riskier assets, riskier countries, and riskier currencies.This is why one should not be surprised that many people invest in government and corporate bonds in sanctioned countries, such as Russia, which offers higher spreads (especially if you consider local currency bills).
After sanctions by Europe and the US in 2014, Russia's bond market was no longer able to issue the same amount of bonds denominated in dollars as before, prompting companies to use Russian (rouble-denominated) capital markets for financing.
In any case, this has not stopped international investors from investing in Russian bonds. In the corporate bond market, telecommunications, essential consumer goods, real estate and more companies have issued bonds.
Gazprom, for example, issued 15 billion roubles of bonds last week (the seven-year bond was twice oversubscribed).
According to Bloomberg data, 60% of the bond is bought by Russian investors, but British investors also account for a large portion (31%).
Russian companies' access to international markets has been curbed, but that has not stopped them from issuing bonds to finance bids and extending the maturity date as long as possible. A good example is a $500m seven-year bond issued by Novolipetsk, a Russian steelmaker. Novolipetsk used the raised funds to buy back $317 million of eurobonds maturing in 2018 and 2019 at a price of $1017.5 and $1053.75, respectively.
In addition, Nostrum Oil & Gas issued $725 million in new bonds in July, mostly subscribed by international investors. Us, UK and continental European investors account for 40 per cent, 39 per cent and 16 per cent, respectively, including global asset managers, investment fund banks, pension funds and insurance companies, according to Bloomberg.
This shows that the market favors Russian risk, and once sanctions are relaxed, Russian corporate bonds will be welcomed abroad.Issuing bonds abroad is crucial for some companies because most of their income is denominated in dollars, especially for metals and mining, chemicals, oil and gas companies.
The Russian market seems to be at risk all the time, but should investors really be afraid of Russian bonds? The reality isIf you like emerging markets but are worried about high inflation in the US, the Russian bond market is likely to provide you with an interesting solution because the country is less affected by US interest rates than many other regions.
Why is that? The main reason is that Russia has been actively seeking independence from the West. This isThe main reason why the country's central bank further increased its gold reserves after the country was sanctioned in 2014. It does not want to rely on foreign currencies such as US dollars.
At present,Russia is one of the world's largest holders of gold, making it less vulnerable to political and economic uncertainty in the United States.
Another factor that enhances Russia's advantage isThe relationship between Russia and China is getting closer and closer. Last month, China Huaxin Energy acquired a 14.16 per cent stake in Rosneft, further confirming the strengthening of relations between the world's two largest energy producers and consumers.
The increase in investment from China means that Russia is becoming more and more independent of European and American investors.
Some aspects of Russia may be rough, but they are not stupid. So do investors. That is why investors enthusiastically subscribe to new Russian government bonds whenever they are issued, especially if they are denominated in dollars.
Last month, 30-year bonds issued by Russia were mainly allocated to the UK and US markets. High demand has depressed Russian bond yields, which is why Russian 10-year bond yields are now at 2013 levels (that is, before Crimea was incorporated into Russia).This shows that Russian bonds are overbought..
Many investors think it is time to sell Russian bonds, but as US interest rates approach and bond yields in developed and emerging markets are low, the real question for investors is: apart from Russia, where else can value be found?