(Bloomberg) -- Russian debt is morphing from bond-market darling to a toxic trade as some of the biggest global investors grow uneasy after the latest U.S. sanctions.
BlackRock Inc., Allianz Global Investors, Schroder Investment Management and JPMorgan Asset Management, which collectively manage just over $1 trillion in global debt, are turning cautious after the biggest selloff in government ruble securities for two years. Market volatility will persist in the next few months as big investors reduce holdings, according to Societe Generale SA.
“It’s a little early to say the worst is over,” said James Barrineau, co-head of emerging-market debt at Schroders in New York. “The threat of sanctions will linger over Russian assets.”
The harshest U.S. sanctions to date have cast a pall over Russian markets, as investors try to understand which company or individual will be targeted next amid a rapid deterioration in relations between Washington and the Kremlin. Meanwhile, two years of inflows from carry traders have left Russian debt markets more vulnerable to selling by foreigners than ever before.
“There was this positive story that inflation was under control and that was sort of a bull story for Russian government bonds, but we think the fall in the currency we’ve seen puts that at risk,” Michael Bell, a global market strategist at JPMorgan AM, said at a briefing in London on Tuesday.
Diane Amoa, a money manager at the same firm, said last week that “nothing is off the table” in terms of which Russian assets could now be targeted by U.S. sanctions.
While the instability was hard to stomach, big international investors probably refrained from offloading their overweight positions during last week’s bout of panic selling and will now be looking for opportunities to reduce exposure to Russia, SocGen said. The Finance Ministry has said that Russia didn’t experience a “mass selloff” of government ruble securities known as OFZs and that it doesn’t expect major changes to the share held by non-residents, which is at a record 34 percent.
Before markets turned volatile, about 95 percent of emerging-market sovereign debt funds were “overweight” the ruble, and 70 percent had a similar call on Russian local-currency debt, analysts at Morgan Stanley said in a research note last week.
While Russian bonds have recouped some of their losses from last week’s selloff, borrowing costs in rubles are still near the highest level since January and yields on some dollar bonds are at their highest in two years.
“The sanctions are unknown territory for most of us,” said Greg Saichin, chief investment officer for emerging-market bonds at Allianz. “It introduces a level of uncertainty we didn’t have before.”
Aberdeen Standard Investments and Amundi Asset Management, who were bullish on Russia until before the sanctions, declined to comment on their latest holdings.
Some investors see the uncertainty as an opportunity to buy up Russian assets on the cheap before they recover when the geopolitical noise fades. Paul McNamara, a London-based fund manager at GAM UK Ltd. said he’s “topped up” his holdings of ruble debt because rising oil prices create a positive backdrop for the economy.
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