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. Last Updated: 07/27/2016

Bond Yields Hit Record Lows Before Placement

A year-long rally in Russia’s international bonds is pushing yields toward record lows as the country prepares to sell debt to foreign investors for the first time since the 1998 default.

After the bonds lost almost twice the average for emerging-market debt in 2008, rates on Russia’s issues have fallen 4.5 percentage points or more from the past year’s highs to within 39 basis points of their lowest ever, data compiled by Bloomberg show.

The cost of protecting against a default by Russia dropped more this year than for any other country with an investment-grade rating.

Investors are piling into debt sold by the world’s largest energy-exporting nation as gross domestic product starts to rebound from a record 10.9 percent second-quarter contraction and the Central Bank boasts foreign reserves of more than $400 billion.

Demand is growing even after the government’s default on $40 billion of ruble debt in 1998 sent global financial markets tumbling and the five-day war with Georgia a decade later triggered a $300 billion cash exodus, data compiled by BNP Paribas show.

“A lot of debtors in 1998 said they’d never touch Russia again, but memory in the bond market is short, so they are all lining up,” said Saleh Daher, the managing director of Boston-based Turan Corp., which owns Russian debt dating back to the Soviet era.

“There is a wall of cash looking for investment, in particular in the emerging-market bond world.”

Russia is planning to return to international bond markets months after the economy suffered from the global financial crisis.

When last year’s credit freeze prompted investors to flee emerging markets, Russia burned through one-third of its reserves in six months, buying $200 billion worth of rubles to make sure the currency’s decline was gradual.

“To their credit, they ran surpluses, and they wisely channeled that windfall into international reserves,” said Michael Gomez, who oversees about $30 billion as co-head of emerging markets at Pimco.

“It gave them a cushion to navigate the extraordinary events of 2008 and 2009,” he said.

Moody’s Investors Service gave Russia its first investment grade rating in 2003, followed by Fitch Ratings in 2004 and Standard & Poor’s in 2005.

It’s now rated three levels above junk at Baa1 by Moody’s and one level lower at BBB by Fitch and Standard & Poor’s.

The country’s total foreign sovereign debt stood at $38.1 billion as of Oct. 1, Central Bank data show.

Total debt is at 9 percent of GDP this year, down from 63 percent in 2000, according to data from S&P.