For a long time, Bank deposits, including currency, considered a reliable investment for conservative private investors. However, the sanctions rhetoric of the U.S. against Russian banks is forcing investors to look for alternatives. Offer conservative investor’s bond market?
US Treasury bonds (US Treasuries)
The most reliable the borrower is the government. Usually this is because the economy is more stable than the economy of a single Corporation or Bank. In addition, the state has control over the finances — it can control the emission of money (usually via Central banks).
In this regard, the starting point for conservative investment dollars are US Treasury bonds (US Treasuries). Now a two-year releases give a yield of about 2.5%, which is a very attractive alternative to any Deposit in foreign currency. The risks of such investments are minimal: even in case of increase in rates, which will likely happen, the investor in two years will get their money and the accumulated income. The credit quality of the United States remains high — especially considering the possibility of issuing new dollars.
According to March 11
Treasury bonds are very liquid securities, making investments of investors of mobile. You can store your savings, not only in a Bank, but also in the brokerage account and to transfer them between accounts.
Of the risks of such investments can mention only the tax consequences for residents of Russia, whose tax base is calculated in rubles. Thus, there is a risk of paying a substantial tax, if the ruble greatly devalued the US dollar.
Bonds of multinational corporations
If you go down the hierarchy of risks, the second best option is to call the obligation of large multinational companies. They have a very high credit rating, comparable with the sovereign rating of the United States. Apple, Microsoft, Pfizer and Nestle to place public debt, which is slightly less liquid and have greater credit risk than US government bonds, however, offer some prize in return. Securities of such issuers maturing in 2020-2021 years investor can bring a 2.7–2.9% per annum.
Depending on the preferences of the investor for the risk, country and industry it is possible to list a number of big issuers with high credit rating. The average 2-3 year horizon, they can bring a yield of about 3.0-3.4 percent. On the one hand, it’s not a very big premium to US treasuries, but if we are talking about significant amounts, then each additional 0.5 percentage points matter.
Among the disadvantages of such investments (in addition to the risks associated with foreign exchange revaluation which always pursue tax residents of Russia) it is possible to note the credit risk, though slight. Large corporations with international business rarely defaulted, but if we’re talking about developed countries, such examples and at all units. However, it is always better to mitigate such risks and to diversify the portfolio. In this case we are talking about a portfolio of securities that you want in varying degrees, to follow.
The national debt of developing countries
More risky but more profitable investments will be securities of developing countries. The 1997-1998 crisis arose precisely because of the fact that many of the States in this category were ill-prepared to an outflow of international investors and corrections in commodity markets. Since then, it took quite a long time by the standards of the financial markets, and the country learned a hard lesson.
Russia, which was one of the culprits of the crisis, while the chief victim, for 20 years has significantly improved its financial situation. At the moment in the country’s trade surplus — Russia exports of goods and services more than imports, and the debt to GDP ratio is 13.5%. This is less than any country that is above Russia in the ranking in terms of GDP (the United States, the ratio is 105%, China — 47,6%, in Japan — 253% Germany -64%). This, along with the strong position of Russia as the main energy supplier of Europe, makes the credit profile of the country is very stable. As regards public debt, the sovereign Eurobonds of Russia in with maturity in 2020 provides a yield of about 3%.
In addition, the Eurobonds of Russia offer some prize for the tax residents of the country. First, interest income on such bonds is not taxed, and, secondly, 2019 upon the sale or maturity of these securities is not taken into account the effect of changes in exchange rate. The investor will pay tax only if the price of bonds will rise, and only the difference between the sales price (redemption) and purchase of paper, translated into Russian roubles at the date of sale (redemption). All this makes sovereign bonds are very competitive in comparison with foreign currency deposits in Russian banks.
However, we must remember that the principal risks associated with investments in Eurobonds of Russia are in the plane of geopolitics. If we consider the most stringent sanctions scenarios associated with restrictions on payments in dollars, then the investor may experience difficulty obtaining funds from coupons and principal repayment. It is worth noting that such a tough scenario for sure will be preceded by less drastic measures — possibly related to the banking sector Russia, which has repeatedly said in the United States.
Eurobonds of Russian banks
Eurobonds of Russian banks are the closest alternative to deposits credit risk. The main difference in Deposit insurance by the Deposit insurance Agency that are out of date, if we are talking about significant amounts. In the Wake of the sanctions rhetoric yield securities to state-owned banks, maturing in 2019-2020 increased to 5-5,5%. And the yield of Eurobonds of VEB, which is a development institution and does not accept retail deposits reached 7.3% per annum (for the issue maturing in 2020) that was very distracting from the overall picture. Now the situation is somewhat normalized — yield decreased to 4.5–5%%.
Unfortunately, the paper of the Russian banks do not have as attractive investor tax breaks, as a sovereign Russian debt, so from the point of view of risks for the currency revaluation, they are no different from those of the Eurobonds of foreign issuers. The main difference in the sanctions risk.
Holders of Eurobonds of Russian issuers often act as foreign investors, so the American vestat have to accompany their sanctions various reservations. For example, last year market participants have clarified OFAC (Office of Foreign Asset Control — a division of the U.S. Treasury, dealing, including, planning and economic sanctions) on Euro bonds fell under the sanctions of the company UC Rusal, which suggests that the company may use dollars to settle its obligations.
Considering the alternative, it is possible to notice that the difference in yield between them, by and large, not very big. But you need to be aware that these papers differ significantly in the extent of credit, sanctions and tax risks. Sometimes in the pursuit of an additional 0.5-1 percentage point conservative investors have unwittingly switched to a completely different category of tools. It can play a cruel joke in the moment of realization of a negative scenario. Expecting stability from your portfolio, the investor can get his drawdown or significant reduction in mobility (reservation of funds, prohibition of trade, liquidity, etc.). Therefore, when choosing an alternative to deposits is to be extremely attentive to the risks.
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