♠ Posted by Emmanuel in Russia at 4/17/2014 12:34:00 AMpost, I talked about a Franklin Templeton bond fund I was offered that was full of Ukraine bonds. Let's just say I was sane enough to dodge that bullet. I have since invested my euro-denominated savings--I am not dumb enough to hold a boatload of dollars as I keep mentioning in this blog. What did I put them in? As a conservative investor, I put it into a bond fund of short duration, "just right" investments: not quite investment-grade but reasonably safe and higher yielding in comparison to German bunds and the like.
Anyway, I placed my funds at the end of last month. I was afraid that I had run out of juice since Eurozone yields were already at historic lows. Could they go even lower? Thankfully they can. What's more, I have Vlad Putin to thank. The geopolitical story goes like this: diversified investors want to keep a European presence, yet they are aware that bond prices don't have much higher to go. Even the brokest of the broke, the Greeks, can actually borrow again at sub-6% rates. It's a miracle if you ask me.
Now, to the "financial martyrdom" part. Putin is sacrificing the well-being of the Russian economy to help small retail investors like yours truly with a few euros to place. Largely because of its leader's military adventurism, Russia has scrapped bond auction after bond auction in 2014:
Russia canceled its eighth bond sale this year as Finance Minister Anton Siluanov said the nation is facing the toughest conditions since 2008, when Lehman Brothers Holdings Inc.’s collapse sparked the financial crisis. Yields on local currency 10-year bonds jumped 76 basis points since Russia’s incursion into Ukraine’s Crimea region at the start of March. Rates on similar-maturity securities of Turkey, ranked one level below Russia at Fitch Ratings, fell 30 basis points in the period.
Russia is being frozen out of government bond markets after President Vladimir Putin’s annexation of Crimea drove relations with the U.S. and Europe to a Cold War low. The economy may not grow this year, with “considerable geopolitical risks” the main driver of Russian capital outflows, Siluanov said at a ministry meeting yesterday.
Yields on Russian debt are circling the stratospheric heights previously occupied by Greece and other European deadbeats:
The government won’t sell bonds when yields are too high, Siluanov said on April 1 after Russia announced a second-quarter borrowing plan of 150 billion rubles, 50 percent smaller than the same period last year.
The yield on Russia’s 10-year securities rose for a third day yesterday, adding seven basis points to 9.14 percent as of 6:27 p.m. in Moscow. The rate reached 9.79 percent on March 14, the highest since October 2009. “The current rates are still too expensive for them,” Yulia Safarbakova, an analyst at BCS Financial Group, said by e-mail yesterday. “That’s as long as the budget is in surplus” no other territories join Russia and the oil price stays high, she said.
Russia isn't exactly desperate to borrow at the moment since it has those $400 billion-something in foreign exchange reserves. That's even as its economy heads towards the zero growth mark due to all those Western sanctions and what else have you as money flees the country. This is where Putin's magnanimous nature comes in. Where else would the money fleeing Russia go but to nearby EU member countries? Investors are still looking for more yield than German bunds and other investment-grade stuff to place in. So, why not invest in places like Romania? As it so happens, this former Soviet-bloc country's borrowing costs are hitting all-time lows:
Romania raised 1.25 billion euros ($1.7 billion) in its second international bond sale this year, taking advantage of record-low borrowing costs to finance its budget deficit. The government sold 10-year bonds today at a yield of 200 basis points above mid-swaps, the equivalent of 3.7 percent, the lowest on record for the country, Budget Minister Liviu Voinea said in a phone interview. Citigroup Inc. (C), ING Groep NV, Societe Generale SA (GLE) and UniCredit SpA (UCG) managed the sale, Diana Popescu, deputy director at the Treasury, said by phone...As investors flee Russia, they are piling into the likes of Romania and other "just-right" investments:
“We’ve completed our international funding needs for this year eight months ahead of schedule with today’s sale,” Voinea said. “This doesn’t mean that we won’t issue again if market opportunities allow, but it will be to pre-finance 2015.”
Romania, the European Union’s fastest growing economy in the fourth quarter of 2013, is seeking to attract capital outflows from Ukraine. Investors are pulling money out of Romania’s northeastern neighbor as concern mounts that Russia will seize more of Ukraine after annexing Crimea in March. The yield on Romania’s eurobonds due in 2020 fell 2 basis points to 3.097 percent at 8:14 p.m. in Bucharest, a record low, according to data compiled by Bloomberg...
“The disputes between Russia and Ukraine remain important to watch, but I would say investors have now digested the fact that as long as negotiations continue in Ukraine the contagion impact on central Europe is minimal,” Raffaella Tenconi, a London-based economist at Bank of America Corp., said by e-mail.While Russia and Ukraine are locking horns, others stand to benefit as money piles in elsewhere. Thankfully, "elsewhere" happens to be in Europe just as investors seek the relative safety of bonds in parts of that continent where Putin isn't likely to send his guns, goons and gold. It seems Russian aggression is inversely related to bond yields of EU debt issuances.
As I said, what a thoughtful man this Vlad Putin. He's always helping out us small retail bond investors. Just when you thought euro-denominated bonds had run out of room to run, he engages in all these amusing forays into neighboring countries to not only entertain us with his exploits of shirtless machismo but to also improve the performance of our fixed-income investments. Paraphrasing George W. Bush who drew Putin's portrait above, I looked through his eyes and straight into his soul and saw a man who would capsize his country's economy just to help me eke out better returns on my humble euro investments.