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. Last Updated: 07/27/2016

Russia Surprises With $5.5Bln Bond Pricing

The government priced $5.5 billion of bonds, the second-biggest emerging-market dollar debt offering on record, as the country seized on all-time low yields to return to world capital markets for the first time since defaulting in 1998.

The government priced $2 billion of five-year bonds at a yield of 3.741 percent, or 1.25 percentage points above similar-maturity U.S. Treasuries, and $3.5 billion of 10-year notes at 5.082 percent, or a 1.35 percentage-point spread. The five-year yield is below the rate of 4.5 percent on bonds with the same credit ratings sold by European Union member Lithuania.

“Nobody would have believed that Russia could sell debt at these levels,” said Vladimir Gersamia, senior portfolio manager at Fortis Investments, who helps manage $3 billion of emerging-market debt in London. “Eighteen months ago, everyone thought that emerging markets was a dead asset class.”  

Faster growth in developing economies and near-zero benchmark U.S. interest rates reduced the average emerging-market government yield to a record low of 6.12 percent last week, half the peak in 2008, JPMorgan Chase’s EMBI+ index shows. The International Monetary Fund projects that developing economies will expand three times faster than advanced nations this year. Pacific Investment Management Co., manager of the world’s largest bond fund, recommended a shift away from U.S., British and European debt this week.

Russia’s sale is the second-largest public offering of dollar debt in emerging markets after Qatar’s $7 billion issue in November, Bloomberg data show.

The government is unlikely to return to the eurobond market this year, Konstantin Vyshkovsky, head of the Finance Ministry’s debt department, said Thursday. The country “has no substantial need” to sell more foreign currency bonds in 2010, he said.  

The price of the new five-year bonds was quoted lower before the start of official trading, suggesting that the spread was “too tight,” said Sergei Dergachev, a money manager at Union Investment, which oversees about $220 billion worldwide and has bought some of the bonds. “The Ministry of Finance already knew there would be good demand for the issue, allowing for an aggressive pricing with the yield at the lowest possible level they could achieve.”

Prices dropped about 0.5 cents on the dollar in the so-called gray market, Dergachev said.

The new five-year Russian securities yield about 15 basis points more than comparable Mexican securities, which have the same credit ratings. The 10-year yield is about 20 basis points above Mexico’s equivalent notes, Bloomberg data show. Both countries are rated BBB by Standard & Poor’s, two levels above non-investment grade, and a further step higher at Baa1 by Moody’s Investors Service.

“It’s not a screaming buy, as the five-year is probably going to be something that’s more suitable for central banks who are looking to park their assets into what they consider to be a safe, low-yielding credit,” Kevin Daly, an emerging markets money manager in London at Aberdeen Asset Management, which oversees about $249 billion worldwide, said in an interview. “You’re not going to see spreads narrow any time soon” for the five-year or the 10-year, he said.