It is connected including with the fact that because of the sanctions and reduction of limits on Russia for foreigners the presence of Russian banks in the market interest rate and currency derivatives over the past few years has declined sharply. Russian investors now difficult to make money on the arbitrage between the yield curves OFZ and swap Losev explains.
Interest rates on interest rate swaps allow us to estimate the interest of foreigners in the OFZ, say experts interviewed by Forbes. These rates serve as the indicator of how profitable investments in Russia’s state debt in comparison with transactions in swaps. Both of these rate — rate swaps and yield of OFZ — often featured in reviews of foreign investment banks.
“The fact that the rate on swaps is higher than on FB, says that foreigners benefit from direct investment in OFZ obvious and they may continue to reduce its stake in the Russian state debt. This means that the Russian market will have to stew in their own juice,” says Losev. Agree and Alexander prosviryakov. “At this level rates to purchase a swap easier and more profitable than the short OFZ,” he says.
The share of foreigners in the OFZ reduced from April this year. For four months (to August 1), it decreased from 34.5% to 28%.
In anticipation of devaluation
Inversion yields of interest rate swaps and the BFL caused by the volatility in the Russian market, General nervousness and outflows of capital, says the head of the UK “Arikapital” Alexey Tretyakov. “Such differences in rates in the bond market and Forex market has happened before, for example in 2014, the gap reached 10%,” — he said.
The growth rates of the swaps may be caused by fears of foreign investors about a possible ban on the purchase of Russian debt against which the market expects of growth of rouble rates, prosviryakov said. According to him, the statement of the head of the Central Bank Elvira Nabiullina of 4 September about a possible increase in the key rate confirms the validity of such sentiments.
The first concerns the introduction of the ban on the participation of American investors in Russian state debt occurred at the beginning of 2018. However, in February, the U.S. Treasury issued the soothing statement that the proliferation of sanctions to OFZ, according to his estimates, can lead to negative consequences not only for Russia but also for the international financial market, and also hit by American investors. The excitement resumed in August, when on the website of the U.S. Congress published a draft law which envisaged the introduction of a ban on the purchase of sovereign debt of Russia.
According to analysts at Citi, with a full ban on the participation of foreigners in the OFZ ruble weakened by 15%, and if the ban only buy new releases by 5%. In August, the Russian currency weakened significantly because of the General sanctions — the ruble began to fall sharply from 7 August, down from 63.5 rubles to the dollar to 67.7 per on 13 Aug. The negative trend began after the appearance of information on the bill of the United States, which provides for freezing Bank accounts and assets of major Russian banks. After that, the Bank of Russia decided on August 23 to the end of September to stop buying for the Ministry of Finance the currency on the open market to stop influence the exchange rate and to suspend the fall of the ruble. Instead, the Ministry of Finance will continue to buy the currency, according to the budget rule, directly from the Bank of Russia.
Harbingers of collapse
Curves, swaps and yields of government bonds began to diverge in April, not only because of the US sanctions, introduced on 6 April, but because of the actions of the Ministry of Finance, which began large-scale purchases of foreign currency amounts at 360-400 billion per month, which became a serious factor of pressure for the ruble, said Losev. In his opinion, the situation has worsened due to the fact that the fed increased the discount rate range in June to 1.75-2%, and the Central Bank since March 2018 kept the key rate unchanged, which significantly reduced the profitability of the carry trade, and forced a number of players to leave the ruble.
The volume of OFZ market is meanwhile growing. If at the beginning of April it amounted to 6.8 trillion rubles by August 1 — already 7.2 trillion rubles. “In the Russian banking system, there is a significant surplus of liquidity, and this restrains increase in the yields of bonds including the state in the domestic market,” adds Losev.
Barring any catastrophically adverse events, in the next 2-3 months, the gap between the interest rate swap and the yield on short Federal loan bonds should be eliminated, says Tretyakov. According to Losev, the yield on OFZ will increase if the Central Bank finally decides to raise the key rate until the end of 2018 to stabilize the financial market.