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. Last Updated: 07/27/2016

New Refinance Plan Shocks Debt Market

The Central Bank sent shock waves through debt markets Thursday when it began taking bids on $14 billion worth of restructured government debt from the years 1992 to 1994, fixed-income traders said Thursday.


During those years, the Russian government borrowed 50 trillion rubles ($8.7 billion) from the Central Bank to finance the budget -- a figure that has grown to 80 trillion rubles today due to inflation, analysts said.


Without warning, the Finance Ministry this week chose to refinance that debt by replacing it with the Central Bank in the form of OFZs, or government savings bonds. No other bidders were invited to participate, analysts said.


The first signs that the bonds existed came Thursday, when the Central Bank began taking bids on the secondary market. When it became clear that $14 billion worth of new bonds were suddenly available for trading, prices plunged and yields touched over 40 percent.


Although the market has known for months that the government's 1997 federal budget called for a large emission of securities, the move took traders by surprise.


"People went to bed thinking that the market was a poodle, and they woke up with a Rottweiler," said Robert Devane with Troika Dialog's fixed income division. "The market took it as potential supply shock. There's a finite amount of money and supply just increased."


The market for T-bills and government savings bonds is capitalized at roughly $40 billion.


Kommersant Daily newspaper reported Thursday that the new government paper would be restructured into 13 issues of bonds, each with a 10 percent coupon and maturities ranging from the year 2001 to 2013.


But some traders said it's doubtful there will ever be a market for the entire 80 trillion rubles of debt.


"Will the government be able to issue all this paper? Probably not," said Anatoly Shvedov, fixed income dealer with ING Bank Eurasia. "But when yields are lower in the regular GKO market it may look interesting."


Most dealers agree that the new, longer-maturity OFZ issue will help the Russian government bring down its borrowing costs by lengthening ruble-denominated yield curves.


"The government has been talking about it more and more," said Nima Tayebi, a fixed income dealer with Renaissance Capital. Efforts began last summer when yields reached 250 percent ahead of President Boris Yeltsin's then-uncertain re-election, he said. But dealers were at a loss to explain why the Central Bank allowed the market to be surprised by the new paper.


"It's such a large sum, it would destroy the market" to sell it all at once, said Andrei Yashchenko, fixed income analyst at United City Bank.


Market watchers stress that right now the new OFZs cannot compete with much higher-yielding GKOs or even ruble-denominated Eurobonds, expected to be issued sometime this year. But "GKOS are still very volatile, and there are investors who will want to lock in a rate of return and sit on it," said James Fenkner, head of research at CentreInvest Securities.


Separately, the Central Bank's further liberalization for non-residents in the GKO market was received positively Thursday, although the news failed to have much of an impact on secondary trading, dealers said.


The Central Bank announced Wednesday that it would end forward-deal requirements, the primary mechanism used to regulated foreign repatriation of GKO profits, by year's end.


More important was yesterday's auction, at which average yields of 35 percent showed the government's willingness to pay more than expected for the issue.


"The fact is that the government needed to borrow more money for the budget ahead of a possible labor strike," said Michael Belkin, a debt trader with Orion Capital.