The latest hysteria around the uneasy relationship between Russia and Ukraine has reportedly failed to scare global investors away from Russia’s debt. International investment majors like Goldman Sachs, BlackRock, Fidelity and Pimco are betting a diplomatic solution could boost interest earnings.
Yields on Russian government and corporate bonds have reportedly surged since the beginning of the year, with the spread between Treasuries and 10-year local-currency sovereign debt rising to 7.8 percentage points at the peak.
The total return on a local-currency 10-year sovereign bond was 6.3% in 2020 and 6% in 2021, versus 1.92% and 0.9% for the equivalent US Treasury note.
Meanwhile, the Russian ruble has depreciated 3.5% against the greenback so far this year and was trading at its weakest level in more than a year last week, before recovering moderately. The Central Bank of Russia suspended its planned foreign-exchange purchases on Monday in an attempt to support the domestic currency. The regulator has hiked interest rates seven times since March 2021, to tame the surging inflation due to the pandemic.
Russian bonds reportedly make up 7% of a popular emerging-market debt index run by JPMorgan Chase & Co. that is used as a benchmark by many fund managers.
“Russian assets could have a big rally back,” Abrdn PLC’s Viktor Szabo, who continues to hold some ruble-denominated Russian sovereign bonds, said, as quoted by WSJ. “It’s not so easy for investors to fully walk away.”
Russia’s current-account surplus increased by 3.5 times in 2021 through November, boosted by rallying crude prices. In January, the country’s international reserves rose to an all-time high of nearly $640 billion. Russia also enjoys a relatively small debt load, at 17% debt-to-GDP. Those factors keep luring investors, who see the underlying financial strength as very promising.
Some of the world’s biggest investors are still sticking to positions in Russian debt.
“My base case is that there likely won’t be a full invasion. We’re in a situation where you still have this frozen conflict, since 2014,” Uday Patnaik, head of emerging-market debt at Legal & General Investment Management, who bought Russian sovereign bonds maturing in 2042 last week, told media.
A complete ban on trading Russia’s government debt was included in the debated list of potential sanctions that Washington and its allies have pledged to introduce against Moscow in case of a military assault in Ukraine. Russian authorities have rejected the idea of war with Ukraine, accusing Western officials of provocative rhetoric that just ramps up tensions.
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