New investment by a wave of foreigners who believe Russia is becoming politically and economically stable may soon lead to a five-point drop in treasury bill yields, fixed income analysts said yesterday.
Yields on domestic treasury bills and bonds should drop to the lower 20s from an average on Monday of 27.73 per cent by summer, though political and economic turmoil could still hit rates, especially in the second half of the year, they said. Nominal yields hit almost 200 per cent early last year.
We have had extraordinarily high real interest rates, but the basic laws of economics apply in Russia, said Richard Deitz, head of fixed income trading at Renaissance Capital investment bank in Moscow.
I expect yields to continue to grind down, with six-month paper yielding in the low 20s by summer.
Domestic investors will stay in T-bills because there is no other Russian market as big or as liquidthe total volume of outstanding GKO discount T-bills and OFZ government bonds is about 250 trillion roubles ($45 billion) nominal.
Daily market turnover is close to $1 billion, against a reported average of about $40 million on the Russian Trading System shares market.
Foreign investors are expected to invest in Russian T-bills, attracted by real yields near 8-10 per cent, assuming Russia meets its inflation target of about 12 per cent this year. The central bank and government have convinced the market that it is in control of market liquidity. The central bank is training the market to salivate every time it rings a bell, said Robert Devane, head of fixed income at Troika-Dialog bank.
Russia is also seen as politically stable, with a peaceful end to the Chechnya crisis and President Boris Yeltsin apparently recovering from health problems. Devane predicted the proportion of Russian T-bills held by foreigners, about 17-18 per cent at present, would grow.
The Russian market is still poorly co-ordinated with other domestic T-bill markets (worldwide), he said, adding that more risk-averse investors would buy Russian domestic debt in order to balance emerging market portfolios.
Foreign demand is seen responsible for keeping the premium on new GKO issues which face a 15 per cent profits tax to about two percentage points above comparable non-tax liable yields.
