Server Information System Statistical Database Express-analysis Periodic Publications Special Materials Archive EU VEDI

Back

First, the loan floated by the St. Petersburg administration (GGKOs) was the largest sub-federal loan until the middle of 1997. The volumes of secondary trading exceeded the volumes of trading in other bonds by one order of magnitude. However, after reaching the maximum debt and transaction volume levels in the middle of 1997, the GGKO market began to decrease. A reduction of the city’s debt was in accordance with the issuer’s debt restructuring policy, which was repeatedly mentioned in our previous surveys. The market for bonds of the Orenburg region (OGKOs), which was created in April 1997, grew enough to have an effect on the St. Petersburg segment of the municipal bond market only by the autumn. During that period, GGKOs and OGKOs accounted for 65 and 35% of municipal bond trading volumes, respectively. However, the world financial crisis in the autumn of 1997 caused a significant deterioration of the situation on the Russian financial market. Since then, developments on the municipal bond segment and on other segments of the financial market were determined mainly by the outflow of capital from the Russian market and an increase in yields on fixed-income securities. Under such conditions, investors preferred to conduct transactions with GGKOs, which were regarded as the most reliable instrument of all municipal bonds.
 

Under such circumstances, the influence of the situation on the GKO market on the municipal bond segment still exists. However, local factors, such as the volume of newly placed issues and the volume of redemption, begin to acquire more importance. Moreover, a wide range of yields on bonds issued by various regional issuers and having various maturities predetermines periodical and significant changes in the structure of investors’ portfolios. This, too, has an impact on the situation on various segments and on the municipal bond market as a whole.
 

A trend towards a decrease in yields dominated the municipal bond market in the first decade of the month. A significant "premium" on municipal bonds as compared to GKOs and OFZs, which existed at the beginning of the period, as well as a slight upward trend on the government securities segment, caused demand for municipal bonds to grow. As a result, by the end of the first decade of march yields on St. Petersburg (GGKOs) and Moscow (OVMZ) bonds were only 2-3 points above yields on GKOs, while the "premium" on Orenburg bonds decreased to 5-6 points as compared to government securities. It should be pointed out that a significant decrease in yields on municipal bonds took place against a background of stabilization of yields on government securities at 25-26% per year.
 

Russia’s recent political developments did not allow to realize the above-mentioned positive expectations. On Monday, on March 23, the news about the dismissal of the Russian government was accepted negatively by investors and caused a significant - by 3-6 points - reduction of municipal bond and government securities prices. Panicky sales of securities continued for a relatively short time. By the middle of the week, yields on GKOs and OFZs returned to 25-27% per year, while yields on municipal bonds decreased too. However, yields on municipal bonds were still higher that the middle-of-the-month level. Nonetheless, a trend towards a steady reduction in yields, which had been observed on the fixed-income securities market since February, was interrupted. This made the market situation uncertain and caused yields to fluctuate.

Here, we should once again consider the effect of local, immanent factors on the situation on the municipal bond market in general and on its St. Petersburg segment in particular. Despite the growth of yields on GKOs and OFZs in the last days of March, a weak upward trend was observed on the segment under consideration during that time. It can be explained by a number of domestic factors. The point is that redemption of a large number of GGKOs worth 150 million rubles is scheduled on April 1. At the same time, 130 million rubles’ worth of bonds is to be placed on that day. It is evident that a significant amount of funds will be left after the auction. These funds can cause yields to decrease if they are reinvested at secondary trading sessions. That’s why an increase in demand for municipal bonds and a corresponding decrease in yields were observed on the eve of the auction.

Thus, a strong upward trend visible in the first decade of March, which caused "premiums" on municipal bonds to decrease as compared to GKOs and OFZs, was replaced by a significant increase in yields. As a result, the final March indicators were practically similar to those in February: the average weighted yield of St. Petersburg bonds at maturity amounted to 33% per year by the end of the month, yields on Orenburg bonds amounted to 39%, while yields on Moscow bonds were close to those on government securities - 30% per year. At the same time, yileds on GKOs decreased slightly during the month, causing an increase in the "premium" on municipal bonds as compared to GKOs and OFZs during that month. This premium amounted to 5 points for GGKOs, 12 points for OGKOs and about 2 points for OVMZs.
 

	In March, the volume of secondary trading in OVMZs amounted to more than 100 million rubles, compared to less than 50 million rubles in January. This was due to the beginning of circulation of these bonds on the Moscow Interbank Currency Exchange (since the middle of February). However, the St. Petersburg Currency Exchange still accounts for the greatest part of transactions with OVMZs. Primary placements of these securities were also more successful in March than in the previous months. During that period, investors were offered OVMZs worth 200 million rubles. While demand was traditionally low, the issuer managed to place more than 20% of these bonds irrespective of the fact that the average auction sales of these securities amount to only 10% of the issue. One reason for such a change was forthcoming large payments (about 300 million rubles) to holders of securities to be redeemed in April. An increase in the percentage of bonds placed through auctions was achieved through fixing higher yields, up to 37% per year, compared to those on the secondary market. Later on, however, yields on newly-issued securities decreased during trading sessions on the secondary market. As a result, the general level of yields on OVMZs did not increase.
	The St. Petersburg administration continues to borrow in the amount that does not exceed current payments to holders of bonds being redeemed. As of the end of March, the debt to GGKO holders amounted to about 3.5 billion rubles. Secondary trading volumes decreased to 580 million rubles in March, from 700 million rubles in February. This fact can be explained by growing "competition": new loans ensure higher yields, compared to those on GGKOs, while the capacity and liquidity of the market for new bonds (though they are still lower than those of the GGKO market) are becoming more attractive to investors. Ranked according to secondary trading volumes, the Orenburg loan is second only to the St. Petersburg loan. In March, the volume of secondary trading in the Orenburg bonds exceeded 200 million rubles and practically reached the maximum pre-crisis level. This was rather a high level, given that the total debt to bond holders amounted to 1.2 billion rubles. A wide range of maturities of circulating bonds explains high liquidity of the market under conditions of a large number of new loans. In late March, for instance, maturities of OGKOs in circulation ranged from one month to two years.
	In April, the Orenburg Region’s loans will be one year old. According to the AVK investment company (the general agent of the loan), bonds worth more than 1.3 billion denominated rubles were placed in 1998. Payments to holders of bonds being redeemed amounted to 180 million rubles, while the annual secondary market turnover amounted to 2.5 billion rubles. Fifty-one official dealers are now working on the OGKO market.   Three new loans appeared on the St. Petersburg segment of the municipal bond market in 1998. All of them have already been mentioned above. This event can be regarded as an ordinary one in the period of intensive development of the municipal bond market. However, rates at which the volume of funds raised at primary auctions and the liquidity of the secondary market increase are rather impressive. We can now consider the main characteristics of new loans and the first results of the circulation of bonds on the St. Petersburg Currency Exchange.
	The Republic of Sakha (Yakutia) made a decision to issue municipal bonds at the end of 1997. That issue was the fifth for the issuer. Yakutia’s first securities, Treasury certificates backed by gold, were issued at the beginning of 1995. When the fifth issue was issued, all previously-issued Yakut securities, with the exception of "rural" bonds, had been redeemed. The Republic of Sakha’s "rural" bonds worth about 150 million rubles, which were issued in the summer of 1997, had been placed by the end of September 1997. At the very end of 1997, the issuer registered one more issue of coupon bonds worth 180 million rubles with maturities from 12 to 18 months. Of the total issue worth 300 million rubles, the issuer registered six-month bonds worth 168 million rubles, nine-month bonds worth 96 million rubles and twelve-month bonds worth 36 million rubles. Sberbank-Kapital is the general agent of the loan. As it has already been mentioned, the St. Petersburg Currency Exchange has been selected as a trading system. Records in depo accounts at the Depositary and Clearing Company confirm the ownership right for bonds. Settlements are carried out by the Settlement Center, which is a non-bank institution acting on the basis of a license issued by the Central Bank of the Russian Federation. At present, 15 institutions are registered as official dealers of the loan. The first auction to sell YAGKOs (with a maturity of six months) was held in the middle of February. Two more issues (with maturities of 273 and 371 days) were placed in March. The total value of these securities sold at auctions amounted to a little less than 200 million rubles. Rather high yields on the new bonds and significant transaction volumes on the secondary market since the first days of trading ensured investors’ interest in these securities. In March, the average daily volume of trading in YAGKOs amounted to about 5 million rubles. At the end of March, the yields on these bonds amounted to between 39 and 43.5% per year depending on maturities.
	The Omsk region’s securities also appeared on the St. Petersburg Currency Exchange in February 1998. The registered issue of these securities was worth 1 billion rubles. Maturities amounted to 9 to 24 months, according to the prospectus of the issue. The AVK investment company is a general agent of the loan. The St. Petersburg Settlement and Depositary Center is a depositary. As in the case of YAGKOs, settlements are handled by the Settlement Center. The Russian Federation Savings Bank (Sberbank) is a settlement agent authorized for services to the issuer. At present, 264 million rubles’ worth of the Omsk Region’s "rural" bonds (al of them had been placed by the beginning of September 1997) and 200 million rubles’ worth of coupon bonds (circulating on the off-exchange market) are in circulation. OmGKOs worth a little less than 200 million rubles have recently been offered for primary placement, 70% of them have been sold. The average daily volume of trading in OmGKOs was about 3 million rubles in March. The yield on OmGKOs was 43-45% per year at the end of March.
	The registered issue of the Leningrad Region’s bonds amounts to 600 million rubles. Maturities are from 6 to 24 months. The region’s debt for commodity credit converted into "rural" bonds now amounts to 25 million rubles (all bonds had been placed by the beginning of September). The issuer floats no other loans at present. The St. Petersburg-based Industrial and Construction Bank is a general agent for the loan. Cash flows are managed by the Settlement Center. The first auction to sell LGKOs was held on January 22. As of the end of March, three LGKO issues worth more than 150 million rubles with maturities of 114, 149 and 352 days were in circulation. Yields at maturity amounted to 36% per year for "short" securities and 44% per year for "long" securities. The average daily volume of trading in LGKOs was 3 million rubles in March. So, the results of March give grounds to assert that a large center of organized municipal bond trading has appeared in St. Petersburg. The total volume of trading in securities circulating on the St. Petersburg Currency Exchange exceeded 1 billion rubles in March. The total announced market capacity is more than 5 billion rubles.

If an upward trend evolves on the GKO/OFZ market in April, investors that have municipal bonds in their portfolios will earn additional profit due to faster growth of municipal bond prices (mostly prices for "long" securities) as compared to GKO prices. This price growth will first affect the St. Petersburg bonds and then other securities.

If an unfavorable situation develops on the GKO/OFZ market (as a result of foreign investors’ refusal to transfer new funds to the market), further growth of yields will be restricted by a limited volume of new issues (According to Russia’s Ministry of Finance, only refinancing of the domestic debt will be carried out in the near future).

Correspondingly, yields on municipal bonds will hardly grow significantly. However, the "premium" on municipal bonds as compared to government securities will most probably remain at the end-of-March level.

Local factors that will affect the municipal bond market in April will include the following: GGKO redemption that will take nearly 400 million rubles. Taking into account that the St. Petersburg administration carries out a policy aimed at domestic debt reduction, it can be assumed that new issues is likely to amount to a smaller figure in April. In this case, the supply-demand situation on the St. Petersburg segment will be determined by the size of new loans.

OVMZ redemption will take about 300 million rubles. In view of this, it can be expected that new issues to be offered to investors in April will be large.

Floating of two new loans (those of the Lipetsk and Nizhni Novgorod regions) on the Moscow Interbank Currency Exchange (MICEX) is planned for the next month. These projects are interesting from the viewpoint of formation of a liquid secondary market for municipal bonds on the MICEX. At present, there is practically no secondary market for municipal bonds circulating on the MICEX, including bonds issued by the Republic of Tatarstan and the Moscow Region, as well as "rural" and "energy" bonds (Moscow’s bonds are now the only exception).