13 Jan 2015
Russian bonds moving closer to junk – DB
FXStreet (Barcelona) - According to Deutsche Bank, Russia bonds are moving closer to junk, and if one more rating agency puts Russian sovereign bonds below investment grade then some forced-selling might be seen in Russian bonds.
Key Quotes
“Fitch downgraded Russia’s credit rating to BBB- and left its outlook Negative, citing significant deterioration in the economic outlook, continued impacts of western sanctions, plunging oil prices, shocks to the banking sector (by rouble depreciation, market volatility and hikes in policy rates as some of the main reasons).”
“It is worth noting that the agency’s assumption on oil price is USD70/bbl for 2015, which seems optimistic in our view.”
“S&P, which rates Russia already at BBB-, is on the brink of downgrading the sovereign too later this month.”
“Moody’s still has Russia at BBB but with Negative outlook. It is clear the risk for Russia to become a fallen angel in 2015, even within the next few months, has significantly increased, and has become our base case scenario.”
“If two out of three of these major agencies put Russia below investment grade, Russia will be removed from the Barclays Global Aggregate Index, creating some forced selling by cross-over investors.”
“The silver lining is that many of these investors have likely already sold Russian bonds.”
“Russia’s credit spreads are already at an elevated levels (5Y CDS: 575bp), more than pricing in on a sub-investment grade status. However, market pricing embeds significant amount of risk premium to compensate for a potential crisis situation on the back of further drop in oil prices, geo-political confrontations, on-going sanctions, and deeper economic stress – all of these risks are biased to the downside over the near term.”
Key Quotes
“Fitch downgraded Russia’s credit rating to BBB- and left its outlook Negative, citing significant deterioration in the economic outlook, continued impacts of western sanctions, plunging oil prices, shocks to the banking sector (by rouble depreciation, market volatility and hikes in policy rates as some of the main reasons).”
“It is worth noting that the agency’s assumption on oil price is USD70/bbl for 2015, which seems optimistic in our view.”
“S&P, which rates Russia already at BBB-, is on the brink of downgrading the sovereign too later this month.”
“Moody’s still has Russia at BBB but with Negative outlook. It is clear the risk for Russia to become a fallen angel in 2015, even within the next few months, has significantly increased, and has become our base case scenario.”
“If two out of three of these major agencies put Russia below investment grade, Russia will be removed from the Barclays Global Aggregate Index, creating some forced selling by cross-over investors.”
“The silver lining is that many of these investors have likely already sold Russian bonds.”
“Russia’s credit spreads are already at an elevated levels (5Y CDS: 575bp), more than pricing in on a sub-investment grade status. However, market pricing embeds significant amount of risk premium to compensate for a potential crisis situation on the back of further drop in oil prices, geo-political confrontations, on-going sanctions, and deeper economic stress – all of these risks are biased to the downside over the near term.”