The government bond index on the Moscow Exchange plunged down and sank to lows in two and a half years. A decline in OFZ quotes along with an increase in their yield has been observed since the beginning of 2021, but the fall in October-November was almost sheer. This means that the government will have to borrow in the market at higher rates. However, given the current budget surplus, there is no such danger. At the same time, high bond yields are driving up the cost of funding.
Due to the strong financial position of the state (small debt and solid reserves), Russian bonds have attracted the attention of both domestic and foreign investors in recent years for their combination of reliability and relatively high interest rates on securities. Since the end of last year, bond yields have crawled up, although the main parameters of the economy and the state budget looked good: economic growth resumed, oil prices increased, and the state passed the crisis, almost without spending reserves (and what was spent soon recovered).
Nevertheless, due to the threat of accelerating inflation, the Bank of Russia began to raise the rate, and at a rather sharp pace. This has played a key role in the OFZ quotes in recent months. The same thing is happening now in concentrated form. On November 19, the price index of Russian government bonds RGBI dropped to 135.4 points, which is the minimum since January 2019, long before the pandemic. At the same time, the market yield of 10-year OFZs rose to 8.4%, the maximum since the same time, said Mark Goikhman, chief analyst at TeleTrade, in an interview with Izvestia.
Photo: Izvestia / Alexander Kazakov
— This negative movement is primarily due to the increase in inflation to 8.13% and the expectation of the continuation of this process. Fuel to the fire was added by the statement of the head of the Bank of Russia Elvira Nabiullina on her readiness to resist the rise in prices in the most decisive way, including by further increasing the key rate from the current 7.5%. The market places such an increase in prices to 8.25–8.5% for the near future.
According to him, investors proceed from the fact that the key rate must exceed inflation in order to successfully counter it. If the interest on loans rises, this will also cause an increase in the interest on government securities: in the financial sector, everything is connected and the returns on assets are comparable. And an increase in the yield of government securities for the future means a decrease in their price. But investors are selling them now, without waiting for the price to decline in the future. All this puts downward pressure on OFZ quotes.
As the expert on the stock market “BCS World of Investments” Evgeny Kalyanov noted, at the next meeting of the Board of Directors of the Bank of Russia, the key rate is expected to rise to 8.5%.
– The negative dynamics of government bond prices is due to the need to comply with the projected yield, which directly depends on the Central Bank rate. In order to increase the yield on bonds, it is necessary to reduce its price. The current OFZ price levels may already look attractive to buy.
At the same time, Aleksey Kovalev, an analyst at Finam Group, clarified that the segment of federal loan bonds with fixed coupons is actively decreasing, where the current price levels correspond to the values of the beginning of 2019.
Photo: Izvestia / Alexander Kazakov
– This is due to the fact that the prices of such bonds react negatively to the growth of interest rates (yields), while now the Central Bank is actively raising the key rate, while two other segments of the OFZ market (securities with variable coupons and linked to the inflation index) feel I’m pretty confident now.
At the same time, the interlocutor of Izvestia drew attention to the fact that quotations of long-term OFZs have stabilized.
– There is reason to expect that in 2022 the Central Bank rate hike cycle, if it does not start, will at least end. And the debt market, when pricing the longest securities, will be guided by some long-term stable levels of ruble interest rates.
For the economy, the current rise in yields means that it is now more difficult for the government to borrow money on the open market.
– For public finances, this phenomenon is rather negative. Relatively less funds are attracted from the placement of loans in OFZs to replenish the budget. At the same time, an increase in interest on government bonds means higher budget costs for servicing them. This is not catastrophic, the budget remains in surplus and is successfully replenished due, in particular, to high export prices for energy resources, – Mark Goikhman emphasized.
Photo: TASS / Stanislav Krasilnikov
According to Alexei Kovalev, the growth in OFZ yields affects the wider economy in the sense that government bonds are, in fact, a risk-free ruble asset. The growth in OFZ yields means that money in the economy is becoming more expensive, the cost of funding is growing, that is, as the Central Bank says, monetary conditions are tightening.
Low quotes and high interest rates on bonds are attracting private investors. But is it worth now for an ordinary market participant to enter this sector?
— Long-term sustainable levels for ruble interest rates are much lower than the current ones, as a result of which bondholders will be able to have additional income to the coupon due to the growth in the price of their portfolios. Thus, it makes sense to enter long-term OFZs now, — believes Kovalev.
And according to Mark Goikhman, it is still too early to do this.
— With a further increase in the rate, they may decrease in price even further, and then there will be a convenient moment to buy.