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. Last Updated: 07/27/2016

Debt Market Hottest in the World

Russia’s equity market may be plunging, but its debt market is outpacing the world.

Russia’s portion of J.P. Morgan’s Emerging Markets Bond Index, or EMBI+, was up a hefty 55 percent from January to December, followed by unpredictable Ecuador and Mexico, which are up 50.5 percent and 18 percent, respectively.

"What we see is global reappraisal of the debt markets," said Alexander Ovchinnikov, fixed-income analyst with Troika Dialog. "It’s going to be a bond play next year."

The biggest problems bothering emerging debt players in recent weeks were quickly addressed by the International Monetary Fund, which rushed to rescue Argentina and Turkey.

"A lot of tension has been reduced in the past weeks [by the IMF]," said a fixed-income analyst in a London-based investment bank, who asked that his name be withheld.

EMBI+ for Russia closed at 130.05 on Dec. 21, still below its all-time high in the spring of 1998, when the sub-index hit a notch of 193.13 on March 23.

Six months later, it dropped to an all-time low of 24.4, inflicting a loss of 87 percent on those who bought the debts — mostly in the form of eurobonds — at their peak.

But this year, it was a completely different story.

"What we’ve seen is people plowing money into funds that manage emerging market debts," said Ovchinnikov. "This trend was further reinforced by the Fed’s statement on interest rates and Nasdaq’s fall."

The Fed, or U.S. Federal Reserve Board, left key overnight interest rates unchanged at 6.5 percent, triggering a sell-off in high-tech Nasdaq shares, which plunged 4.3 percent Tuesday and then 7.1 percent Wednesday on the news.

"Debts could get an inflow of fresh funds next year," said a fixed-income analyst in London. "What we are going to see is clients calling their fund managers and asking them why they are underweight in debts and, particularly, in Russia."

The bad news for local debt traders came from Europe, where Brent crude oil futures dropped to below $22 per barrel.

Analysts expect investors to do their homework carefully before lending to Russia.

"People will look closer at the balance of payments and other macro figures when oil hovers at such levels," said Ovchinnikov.

Even so, the debts are much more stable than in the past, when they moved in wild swings.

"In the past, Russian debts were traded with a leverage and the market was very volatile," said Eric Kraus, chief strategist with NIKoil.

Having burned their fingers in the 1998 crisis, a lot of traders have begun to shun margin trading, in which borrowed funds are used to bloat the exposure.

If the market goes up, the effort pays off, but if you fail to predict its next twist, the leverage will drain your account at an accelerating pace.

The EMBI+, which is up 14.95 percent year-to-date, is heavily packed with the debts of Argentina, Brazil and Mexico, which together make up about two-thirds of the index. Russia has a share of some 7.4 percent.