beyondbrics

How low can Russian rouble yields go? Sberbank this week raised Rbs25bn ($832m) in a 10-year eurobond issue at just 7 per cent, the lowest coupon for a Russian issuer since before the 2008 global crisis.

The yield matches the record low achieved by rival bank VTB. But that was in 2006, and for three-year money. Despite recent warnings about a possible bubble in emerging market debt, investors are clearly still bullish on the asset class and bullish on Russia.

As state-controlled banks, Sberbank and VTB both command a premium over private sector issuers. People close to Sberbank pointed out that the bank had actually sold its rouble bonds at a lower coupon than the Russian government had ever achieved.

The 7 per cent yield compares with current 6.6 to 6.7 per cent yield in the market for the government’s 10-year rouble paper.

Ivan Tchakarov, Russia economist at Renaissance Capital, told beyondbrics there was still a bit further to go with the compression of Russian spreads. After a 200 basis-point drop in the second half of 2012, Russian rouble spreads could decline a further 50 to 80 basis points this year, he said.

Tchakarov pointed out that while the bonds of two rival emerging market issuers, Turkey and South Africa, could be cleared on the convenient Euroclear system, Russian rouble bonds could not. But with Russia due to cross this hurdle very soon, Russian issuers could expect a boost in the near future.

But as Timothy Ash of Standard Bank wrote in a guest post for beyondbrics on Friday, a lot depends on investors’ continuing willingness to buy overpriced EM bonds:

What kind of worries me at the moment is that it seems credit risk is not being priced in at all.

Now you might say this doesn’t apply to state-run Russian borrowers such as Sberbank. Russia defaulted on rouble paper in 1998 but that was a lifetime ago in investors’ memories. Russia, with its huge foreign exchange reserves, is now a different country. Perhaps – but if the there is an EM bond market bubble and it is pricked, it’s hard to see how even top-ranked issuers won’t suffer in the ensuing confusion.

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