Why investors are betting on Ukrainian and Russian bonds. Wsj report
Trading in Ukrainian and Russian bonds is high risk and also poses reputational dangers, however here are the forecasts of investors who rush into it
Investors are starting to buy Ukrainian and Russian bonds that have collapsed at discounted prices, betting that they will recover if the war between the two countries ends. Trading is high risk given the uncertainty about what Ukraine will look like after the war and how long the financial cordon around Russia will last. It also poses reputational dangers due to the human cost of the conflict and the growing reluctance of many financial institutions and companies to be associated with Russia in any way – writes the WSJ .
Gramercy Funds Management LLC's investment team held an extraordinary meeting on Saturday, February 26, to discuss the impact of the invasion on the company's macroeconomy and portfolio. Mohamed El-Erian, chairman of Gramercy and former senior executive of Pacific Investment Management Co. participated alongside Gramercy founder Robert Koenigsberger, who has been a player in Argentine government bond restructuring.
One idea the company considered was the purchase of Ukrainian government bonds, which had fallen to around 45 cents. The firm had the ability to buy because it had sold all of its Russian and Ukrainian bonds about a month earlier.
Ukraine will likely remain independent in some form after the war and receive massive financial aid from Europe and the US, Gramercy analysts believe. But they weren't sure how much debt investors would be asked to forgive in a potential restructuring and decided to wait given the uncertainty.
“We had to be careful not to buy too fast,” Koenigsberger said.
Ukraine made an interest payment, issued a new bond and told investors it plans to honor its debt, but prices continued to drop as the Russian military advanced. The country's bonds fell to 22 cents on March 2 and Greenwich's Gramercy began buying.
Prices may drop further, but the risk of missing a rebound is greater, Koenigsberger said. "When you feel really scared, you still have to plan your trading and negotiate the plan."
Now is a good time to start buying Ukrainian bonds, but many clients are hesitant to participate, said another emerging market fund manager who bought the country's bonds in recent days. “We actually had two of our biggest investors contacting us to say no Russia and maybe no Ukraine because it could become part of Russia,” he said.
Gramercy and the emerging market fund manager said they are not considering buying Russian government debt, but others are diving in, or at least trying.
Russian dollar-denominated sovereign bonds were quoted at around 17 cents on March 2, down from 95 the previous week. This is well below what investors are likely to receive in a restructuring if Russia defaults, even if it will take years to pay off, said a US hedge-fund manager looking to buy. The problem is finding the bonds, added the hedge-fund manager, who found only $ 5 million worth of bonds to buy.
Numerous pensions, insurers and money managers are trying to offload their Russian debt, but trading has stalled after Western sanctions cut the country out of the global banking system. The penalties do not apply to transactions involving existing Russian government bonds, but most investment banks that normally trade in debt are not selling.
Some banks want the bonds to offset transactions involving Russian credit-default swaps, or CDSs, the hedge-fund manager said. Others are not trading at all, due to concerns over restrictions set by Western and Russian authorities. Current sanctions do not prohibit trade in existing Russian public debt, but traders fear they could be included in future developments, causing another price drop.
US and European authorities banned the trade in new Russian government bonds, froze Russian foreign exchange reserves and banned several Russian banks from the Swift system. Russia's central bank responded by temporarily blocking payments of its ruble-denominated bonds to international investors in an effort to protect its currency.
This has had a cooling effect on the clearing houses that maintain the plumbing of the financial system. Euroclear said it would no longer regulate trading in ruble-denominated securities. The Depository Trust and Clearing Corp. (DTCC) said it would stop processing transactions involving about a dozen dollar-denominated Russian government bonds.
Trading is primarily between international banks and investors in dollar-denominated government and corporate debt, the fund managers said. Measures imposed by Western and Russian authorities have blocked transactions in ruble-denominated debt involving Russian counterparties.
(Extract from the foreign press review by eprcomunicazione )
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-gli-investitori-puntano-su-bond-ucraini-e-russi-report-wsj/ on Sat, 12 Mar 2022 06:28:46 +0000.