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. Last Updated: 07/27/2016

Faith Gaining Foothold in New Bond Market

Confidence is slowing growing in the fledgling OBR bond market, the successor to the collapsed treasury-bill market, with trading volumes doubling and yields dropping drastically in the six weeks since it was launched.

The bond successfully passed a crucial test Oct. 14 when the Central Bank bought back its first one-month issue, but traders said this week that the market remains small and trading is fairly artificial.

Dealers said banks, the only entities permitted to trade, continue to treat the bond with caution because its success is dependent on the state's still undefined economic policies.

"The crisis has been the determining influence on this market," said Veniamin Simonov, chief analyst at the Moscow Interbank Currency Exchange, or MICEX, which trades OBRs. "Its future depends on the course the crisis takes and on the success of the government's anti-crisis measures."

The Central Bank started issuing the bonds in September to provide an alternative to the T-bill market which the government froze Aug. 17.

Trading volume has climbed erratically from 46 million rubles ($3 million) on Sept. 24 to a high last week of 109.5 million rubles ($36 million). Yields on the one-month paper have fallen from around 100 percent to less than 30 percent during the same period. Traders said, however, that the Central Bankis likely propping up the market.

The fear of further ruble devaluation puts investors off buying the OBRs. "Investing in OBRs makes sense as long as the currency remains stable," said Andrei Zaitsev, a fixed-income trader at ING bank, one of the more active participants on the OBR market.

"Fear of devaluation is driving investors into the shortest-term paper on offer on the secondary market. Many people have been moving into shorter-term papers in anticipation of the moratorium being lifted and nonresidents being allowed to withdraw their money," Zaitsev said.

But one big attraction of the OBRs is that they can be used as collateral to obtain short-term repo loans under a Central Bank scheme introduced two weeks ago.

At the outset, the Central Bank said it would allow banks to swap their frozen T-bills for OBRs. Traders said few deals of this sort were concluded and they have ceased completely now.

In the meantime, OBR trading appears to be taking on the characteristics of a regularly functioning securities market, said Konstantin Svyatny, head of fixed income at Rossiisky Kredit bank.

"The market has been acquiring sensible features," he said. "Its trading cycles are beginning to show, complete with surges and slumps in trading activities."

Mikhail Vasilyev, deputy head of securities at Alba Alliance, a commercial bank in Moscow, said, however, that the market was still flimsy.

"The big players are either deeply distrustful of it or are simply preoccupied with trying to stay afloat, not with profit-chasing," he said.

Some potential participants may have been put off by an ongoing dispute between the Central Bank and the Federal Securities Commission, the market watchdog, over whether the bank had proper authority to issue new paper in the first place. The commission insists it must register the securities if they are to be valid.