Borrow cheaply: Government debt rally will help close budget deficit
The Russian government bond market continues to experience its best time in several years. Over the past two weeks, the RGBI index, reflecting the average exchange rate of domestic federal loan bonds (OFZ), has been steadily growing throughout most sessions, and in a month and a half it immediately rose by 7%. In general, the growth of quotations has been continuing for six months after the extremely depressive 2024, which is facilitated by expectations of a further reduction in the key rate of the Bank of Russia. This, in turn, increases the government's ability to increase borrowing in the context of budget deficits. Izvestia investigated what is happening with the Russian national debt.
Straightened spring
The years 2023-2024 were truly black for OFZ. From the beginning of 2023 to the middle of December 2024, the RGBI index dropped by more than 30%, from 129 to 98 points. This was not the deepest drop in this indicator, but one of the longest, which largely reflects the situation with the Central Bank's key rate. A more than twofold increase in the rate could not but bring down bond prices and, consequently, radically increase their profitability.
At the end of 2024, after the first signals of a possible rate cut, the situation began to unfold. It looked like a straightening of a compressed spring: most OFZs rose sharply in price, and even negative news was mostly ignored by the market. Russian government debt has once again become in significant demand. And it is not surprising, since it offered yields much higher than even the available inflation. An investor who bought securities in order to hold them to maturity was thus guaranteed to receive an impressive income. According to experts, since the end of May, an almost continuous rally has begun, during which 1-3 percentage points have been "cut off" from the yields of securities.
— The strongest dynamics was shown by securities in a short period (1-3 years), where the decrease in yields amounted to 250-350 basis points (bp, or 2.5–3.5 percentage points. — Ed.). In the long term (10 years and above), profitability dropped by 100-150 points," says Andrey Kulakov, head of Gazprombank's Financial Markets Analysis Department. — As a result, short–term securities are consolidating in the range of 14.3—14.7%, the long–term segment is at the level of 14.9-15.0%.
Kulakov believes that bonds will continue to rise in price, and their yields will decrease.
— Our baseline forecast assumes a reduction in the key rate by 100-200 bps, to 18-19%, at the next meeting in July, followed by a reduction to 16% by the end of 2025 and 11% by the end of 2026. So we expect that the decline in yields in the OFZ market will continue. Long-range yields may drop to about 13% by the end of 2025 and, accordingly, 11% by the end of 2026. At the same time, in the short term, it is likely to see a local correction, as the market has set an overly optimistic trajectory for the key rate (for example, a decrease of 2 percentage points in July). It will be possible, for example, if the rate cut proceeds at a slower pace or signs of increased inflationary pressure reappear, the expert admits.
In turn, Alexey Kovalev, Head of Debt Market Analysis at Finam, believes that Russian government bonds are currently overvalued.
— Given that almost the entire OFZ curve has now gone below 15% in terms of yields, the most interesting question is whether the market has "run away" too much in its expectations for monetary policy easing. Nevertheless, the difference between the current level of the key rate and the curve is at a historical maximum (more than 5 percentage points). It is clear that the potential for a further decline in yields is still great, but what if, for example, in the short term, market expectations are not met and the rate reduction process is not so smooth? — asks the interlocutor of Izvestia.
Benefits for investors and the Ministry of Finance
In addition to the obvious benefits for investors who have invested in domestic bonds, there is also an important macroeconomic consequence of the growth of securities. Last year, the government was extremely reluctant to place ordinary government securities against the background of a budget deficit — the percentage was too high for the Ministry of Finance to be ready to offer such bonds. In some cases, the placements did not take place at all. Instead, floaters (floating-rate bonds) were sold at auctions. This year, the deficit also promises to be substantial, so the government needs to sell a large volume of securities. In a situation where OFZ yields are falling, this means that the government has a free hand to some extent. The flip side of the coin is the fact that a large volume of placements can dramatically increase profitability again.
— It is obvious that the public debt placement program does not contribute to a decrease in OFZ yields, says Kovalev. — Yes, now the market situation favors the Ministry, but still, the Ministry of Finance is often forced to offer securities at a price discount to the market. In addition, this year's placement program is focused on long-term securities, which are precisely the focus of investors' interest in the cycle of monetary policy easing.
According to Kulakov, the positive dynamics in the OFZ market allowed the Ministry of Finance to systematically move towards implementing a fairly high borrowing program. The volume of attraction since the beginning of the year has already amounted to 3 trillion rubles at face value. What is equally important is that the Ministry of Finance is able to implement the borrowing program this year due to classic issues with a fixed coupon rate due to the high appetite of investors for interest rate risk against the background of continuing interest rate cuts. This made it possible to reduce the share of floaters in the debt portfolio from 44% to 37% by the end of the first half of 2025.
In an interview with Izvestia, the analyst suggested that this year the Ministry of Finance would not face significant challenges in implementing the borrowing program and would achieve its fulfillment through fixed-coupon securities.
— At the end of April, the Ministry of Finance amended the federal budget figures for 2025, suggesting an expansion of the budget deficit to 3.8 trillion rubles (1.7% of GDP) from 1.2 trillion rubles (0.5% of GDP) previously forecast. The government's expected shortfall in oil and gas revenues (2.6 trillion rubles) will be financed under the budget rule, Kulakov recalls.
If the ruble exchange rate remains strong for a longer period of time, the deficit may be wider than the Finance Ministry expects — 4.3 trillion rubles. In this case, the additional need (0.5 trillion rubles) can be financed both by increasing the volume of debt collection and by using account balances in commercial banks. However, even in the case of an increase in the borrowing program, experts do not expect difficulties with the implementation of the program.
Thus, the current market situation makes it possible to close even a significant increase in the deficit by increasing government debt without any special problems. At the same time, the debt itself remains extremely low and, in any case, will not exceed 20% of GDP, which is one of the smallest indicators among all major economies in the world.
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