Favorable rate: how the record growth of the Russian government bond market in 17 years can affect the dynamics of the ruble

On Wednesday, November 6, the Russian Government Bonds Index (RGBI) updated its all-time high. At the Moscow Exchange, the indicator added 0.12% and for the first time since the observation (since 2002) it reached 150.28 points, after which it started to moderate decline.

According to the Central Bank, since the beginning of 2019, the total volume of the Russian federal loan bond market (OFZ) has grown by almost 1.45 trillion rubles and reached 8.78 trillion. At the same time, the amount of foreign investments increased by 827 billion rubles - up to 2.62 trillion. In general, foreign investors account for almost a third (29.8%) of all OFZ purchases.

Federal loan bonds are debt guaranteed by the government. Investors buy securities issued by the Ministry of Finance and receive stable income on them. In other words, holders of government bonds lend their money to the Russian economy.

According to experts interviewed by RT, one of the reasons for the record growth of the government bond market in recent months was the reduction of sanctions risks for the Russian economy. Thus, the absence of sharp fluctuations in the country's stock and foreign exchange markets increased the demand for Russian assets.

“We are witnessing the departure of the sanctions agenda from the“ first plan ”of Russian realities. For the same reason, the ruble managed to strengthen this year, and the risks of the dollar returning to the level of 70-75 rubles remain restrained, ”said Anton Pokatovich, chief analyst at BCS Premier, in an interview with RT.

Moreover, due to the low level of public debt and the high volume of reserves, Russia can provide investors with strong financial guarantees. As Peter Pushkaryov, chief analyst of TeleTrade Group of Companies, said in a conversation with RT, this factor also makes investments in OFZs more attractive for market players.

“In Russia, the level of public debt is less than 20% of GDP, and almost $ 124 billion - 7% of GDP - are deferred to the National Wealth Fund. Central Bank reserves double the total debt of Russia and reach $ 540 billion, of which almost 20% are in physical gold. Even if in theory it is assumed that the country will not have new debt revenues, the accumulated reserves will be fully enough to quickly settle all debts, which cannot be said today about the USA or Europe, ”Pushkaryov said.

However, analysts consider the profitability of Russian government bonds to be one of the main drivers of the OFZ market. Thus, investing in a country's debt securities remains more profitable for investors than investing in US bonds or European countries.

Today, the yield on government securities with a maturity of 10 years is 6.4% in Russia, and 1.8% in the United States. At the same time, in Germany and France the indicators are at negative levels - near −0.3% and −0.01%, respectively.

According to experts, the yield of debt securities directly depends on the interest rate set in the country. Currently, in Russia the rate is 6.5% per annum, in the USA - 1.5-1.75%, and in the eurozone - 0%.

However, since June 2019, the Bank of Russia has been steadily reducing its key rate. The regulator pursues such a policy to stimulate business activity in the country and economic growth in general. In the long run, the actions of monetary authorities lead to cheaper loans, increased domestic demand and investment.

At the same time, the policy of the Central Bank makes investments in OFZs less profitable. Thus, while the Central Bank rate still remains at a relatively high level, investors are trying to purchase the maximum amount of Russian government bonds with more profitable returns. About this RT told QBF analyst Oleg Bogdanov.

“Until the rate reduction process is completed, we are seeing an increase in prices on the government securities market. OFZ yields with a maturity of one year have already fallen below 6%. The market is ahead of the curve, and government bonds are confidently getting more expensive. This is starting to attract investors, ”the expert explained.

To help ruble

According to Oleg Bogdanov, by the end of 2020, the Bank of Russia may lower its key rate to 5% per annum. Until that moment, the OFZ market will continue to grow, and the influx of new investments in government bonds will help strengthen the ruble.

As noted by Peter Pushkaryov, in the coming months, the national currency will more and more respond to the dynamics of the debt securities sector and will depend less on fluctuations in oil prices. In many ways, the expert associates this with the action of the budget rule.

Recall, within its framework, the Ministry of Finance buys foreign currency and thereby puts pressure on the ruble. In the event of a collapse in the energy market, the ministry ceases operations - and pressure on the ruble weakens. As a result of such actions, the dependence of the national currency on oil is reduced.

“In November, the closest reasonable goal is to reduce the dollar to 62.5 rubles, but in the coming months, this will not be limited to this. Given the sluggish dynamics of the economy of the Eurozone and the national currency of the region up to the Brexit date of January 31, 2020, the euro against the ruble will not grow by the New Year. Most likely, the indicator will reach the level of 68.5–69.5 rubles per euro and will periodically rise slightly above the 70 rubles mark, ”concluded Peter Pushkaryov.