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. Last Updated: 07/27/2016

Dealers: Foreign T-Bill Access Will Not Hurt Bonds

Allowing foreign investors into the market of high-yielding Russian Treasury bills is unlikely to cause a great outflow of assets from other markets, Finance Ministry bond market participants predict.


"It is early to say there will be a big exodus from [Finance-Ministry] bonds into T-bills," said Bank Imperial dealer Alexei Denisov. "The Finance Ministry and the Central Bank must have thought twice before announcing they are going to allow foreigners into T-bills."


Foreigners have long been interested in accessing the ruble-denominated T-bill market, where yields are currently about 70 percent.


Foreigners already are allowed to trade Finance Ministry, or MinFin bonds, which are denominated in hard currency and have longer maturities and lower yields.


"Treasury bills are a short-term ruble investment, while MinFin bonds are a long-term one denominated in dollars," said Eurobank dealer Olivier Coursault. "This is why these two markets are attracting two different kinds of investors, and they will not have an influence on each other."


Treasury bills are issued to fund the current government deficit, while MinFins were originally issued to pay off frozen hard currency accounts.


Russian officials want to attract foreign investors to push down the finance ministry's borrowing costs, and they have made it clear that foreigners will not enjoy the current high T-bill yields.


Authorities have said they will guarantee the final yield on T-bills and assume the currency risk, through currency swaps, leaving the foreign investor with a net yield to be set in line with comparable Western issues.


"From what we understand of the central bank scheme -- a mechanism to invest in GKOs through Russia-owned banks and with the expected yield of around 12 percent -- we consider it much too low for Western investors," said Peter Bartlett, director for the Central and Eastern Europe department of Banque Indosuez, referring to the acronym for the government's popular T-bill program.


The shortest outstanding MinFin tranche, maturing May 14, yields about 13 percent to maturity, while the relatively liquid fourth tranche, maturing in 2003, yields more than 20 percent.


MinFin dealers said they expected no decline in investment in the bonds because T-bills were denominated in rubles and the Russian currency's exchange rate was seen as less secure.


The ruble is pegged until June 30 within a 4,550-5,150 per dollar corridor.


"The GKO market is more risky for Westerners. It is more vulnerable to inflation and changes at the end of the ruble corridor," said Bartlett.


"Western investors would rather have MinFins. They are dollar denominated, are not vulnerable to exchange rate changes and they give very attractive yields," he said.


But some dealers said T-bills could be used as a means of investment diversification.


"Banks could share risks in different instruments, part in T-bills, part in bonds," said Alexander Altunin, Deputy General Manager of Vneshtorgbank's capital markets department.