(Bloomberg) Investors are buying record amounts of notes paying returns based on ruble bonds as Russia prepares to open the market to foreigners, triggering inflows Goldman Sachs Group Inc. estimates may reach $30 billion.
Sales of the structured notes reached $641 million between July and September, the most since Bloomberg began compiling the data in 1999. Russia's so-called OFZ bonds gained 3.8 percent during the quarter as yields tumbled 43 basis points to 7.25 percent, JPMorgan Chase & Co. indexes show. The average yield on similarly rated Mexican government bonds slipped eight basis points to 5.7 percent, the indexes show.
Russia plans to expand the investor base for its 3.1 trillion-ruble ($96 billion) Treasuries market by allowing foreign investors to buy and sell through Euroclear Bank SA, the world's biggest bond settlement system, after five years of discussion. The move will attract $20 billion to $30 billion by mid-2013, Clemens Grafe, chief economist for Goldman Sachs in Russia, said in a Moscow interview on Sept. 27.
"Euroclear will make the Russian domestic bond market more accessible to a wider range of investors," Natasha Smirnova, who helps manage $4 billion of emerging-markets assets as a product specialist at PineBridge Investments in London, said by e-mail. "This should result in a bigger, deeper bond market over time."
Central Depository
While Mexican bonds have been traded through Euroclear since 1995, Russia's Justice Ministry last week registered an order by the market watchdog listing the settlement systems allowed to open nominal holder accounts with a central depository. Trading via Euroclear may happen as soon as December if a single depository is created by November, Stephan Pouyat, head of Brussels-based Euroclear's global product management, said on Sept. 13. That timescale hasn't changed, he said by e-mail.
Credit Suisse Group AG is the biggest seller this year of structured notes at $587.8 million, followed by Citigroup with $244.6 million and JPMorgan with $199.2 million, according to data compiled by Bloomberg.
Also known as credit-linked notes, the securities offer higher yields and tailored maturities that may not be available in the bond market. Investors suffer losses if there's a default either by the bank issuing the note or the reference entity.
Ruble bonds returned 3.8 percent in the third quarter, compared with a 2.6 percent gain for Indian debt and a 0.5 percent decline for Chinese bonds, according to JPMorgan indexes. Brazil's bonds rallied 7.5 percent, the data show.
Foreign Ownership
VTB Capital said in July that the 6 percent of the OFZ market owned by foreign investors may jump fivefold in the first half of next year once the market opens up. The growth of the OFZ market and impact on capital flows will depend on the level of issuance by the Finance Ministry, Goldman's Grafe said.
"The $30 billion inflow from liberalization seems realistic but it could take two to three years," Euroclear's Pouyat said yesterday. "We have to look at it more as a catch-up compared to other emerging markets, as today the percentage of foreign investors on OFZ is relatively low. Now, as for how soon it will catch up, it all depends on how Russia as a country will perform."