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. Last Updated: 07/27/2016

Foreign Interest High in T-Bill Auction

Foreigners are showing strong interest in Russian state treasury bills under new rules that allow greater participation but limit the yields they can earn, traders said Thursday.


Demand by nonresidents could increase in coming months, which would lower Russia's cost of borrowing and raise sorely needed funds for state coffers, they said.


Foreigners bought up 27 percent of a 7 trillion ruble ($1.46 billion) issue of six-month bonds Wednesday -- short of the 35 percent they were permitted to buy, but well above the 10 percent quota they had been limited to before rules on participation and repatriation of profits were eased earlier this month.


"I would say in the face of it, is surprisingly large and successful," said Richard Deitz, head of fixed income trading at Renaissance Capital. "I think foreign participation will go up. I think yesterday's auction will pique certain investors' interest, but it depends on the methods of access that are provided."


The auction was oversubscribed overall, with demand of more than 11 trillion rubles for the 7-trillion ruble issue.


Under the terms of Wednesday's auction, nonresidents were required to buy bonds through Eurobank in Paris -- owned mostly by the Russian Central Bank -- for which they were to receive forward contracts from the Central Bank guaranteeing them a fixed return of 25 percent in dollar terms. Earlier reports suggested that yields for foreigners would be in the 10 to 12 percent range.


"For foreigners, [25 percent] is a good yield," said Vitaly Sotnikov, a GKO trader and analyst at Rinaco-Plus.


By contrast, U.S. six-month treasury bills yield about 5.5 percent annually, while yields in most emerging markets tend to be under 20 percent, said Tom Reed, a fixed-income analyst at AIOC Capital.


Average annualized yields for Russian buyers were 59.03 percent in nominal terms, while on the secondary market issues with similar maturities were yielding between 66 percent and 68 percent Tuesday, the day before the auction.


But given the ruble's real depreciation so far this year, those yields offer dollar returns of closer to 30 or 35 percent, not much more than foreigners are currently allowed.


Andrei Kozlov, deputy chairman of the Central Bank, attributed the high demand to foreign participation."Demand [Wednesday] was 11.2 trillion rubles, and yields fell below 60 percent. This is the effect of nonresidents," Reuters quoted Kozlov as saying.


Sergei Dubinin, chairman of the Central Bank, said last week that foreign participation in the GKO market would help the government raise $1 billion to $1.5 billion dollars in the first half of the year. By the showing so far, that looks like a reasonable target.


"If they do two more of these they'll have $1.5 billion, no problem," Reed said.


But keeping foreigners interested in GKOs will depend on yields and the method of access. The first could change, while the second is less than desirable, traders said.


"It's a first-run issue, showing that interest is substantial and they probably can command higher prices," Reed said.


"If they make the yields unattractive, they won't get the money," said Vladimir Merson, head of fixed income at CS First Boston.


Russia plans to finance much of its 88.5 trillion ruble budget deficit through GKO sales. Allowing nonresidents greater access to the market was one way of increasing demand and forcing yields down to save on the cost of financing previous issues.


Dealers were tight-lipped about which foreign institutions actually participated in the auction, but Merson said a CS First Boston "entity" took part.