Bonds

When bonds can be useful

Bonds have lower volatility compared to stocks and are most often used as a conservative part of the investment portfolio. Coupon bonds yield steady cash flow. Some investors are using the bonds as a temporary haven for their money, waiting for bargains on the stock.

Bond Properties

The main properties of the bonds are:

• Availability of the end term of the bond. When issuing bonds, the issuer indicates the maturity date - that is, the date when the company repurchases the bonds from investors, paying them the nominal value of the bond. Most often, bonds are issued for a period of several months to a year (short-term), from 1 to 5 years (medium-term), from 5 years or more (long-term).

• Payment of interest on bonds is the obligation of the issuer. Here is the dramatic difference between bonds and stocks. If the company is not obliged to pay dividends on shares, and pays them on the recommendation of the board of directors, and the decision on payment is made by the meeting of shareholders, then the payment of interest on bonds is the responsibility of the company. If a company does not pay interest on time, it is called default. In this case, bondholders can demand interest payments through the courts. The issuer determines the value and frequency of payments when issuing bonds. The amount of income is expressed as a percentage of the nominal value of the bond and shows the annual yield.

• Default risk - the risk that the issuer will not be able to fulfill its debt obligations. Some bond issues are assigned credit ratings, which can be used to judge the reliability of bonds. Usually, if the risk of default is large, this can be seen by the yield of bonds to maturity - it is noticeably higher than the average market.

• In the event of liquidation of the enterprise, bondholders have priority on payment, since first of all the company is calculated with all creditors, which include bondholders. As a rule, liquidation occurs in the event of bankruptcy of the company. If the company does not have enough money to settle with all creditors, then the property is sold. Settlements with shareholders take place after the repayment of all obligations and may turn out that the shareholders will not get anything in the end.

• Bondholders, being creditors of the company, do not participate in its management.

Basic concepts

The denomination of the bond is the price at which the bond will be redeemed (redeemed by the issuer from the investor) at the end of its term. Most ruble bonds are issued with a face value of 1000 rubles.

Maturity date is the date on which the bond will be redeemed. There is also an offer - sometimes the issuer can set the date of the offer, this is when he can redeem the bond from the investor by the maturity date. An investor can sell a bond to an offer.

Depreciation - for most bonds, the face value is paid at the end of the circulation term - this is called repayment. But there are bonds with a depreciation of the face value - in this case, the face value is repaid at once, and paid in installments at the entire term of the bond.

Market price - in the market, the price of a bond can differ from the face value and be more or less than the face value. The bond price is expressed as a percentage of the face value, 100% - the price corresponds to the face value of 1000 rubles, 101% - the price is 1% higher than the face value, the price is 1010 rubles. In the market, the price of a bond fluctuates depending on market conditions, interest rates, demand and supply. Usually the range of oscillations is 95-105% of the nominal. But if there is a risk of non-payment of the coupon, then the price may fall and stronger. The closer the maturity date, the closer the bond price to par.

A coupon is cash that the issuer pays periodically on a bond. The coupon rate is expressed as a percentage per annum and shows the bond's annual coupon yield to par. For example, a bond denomination of 1000 rubles, a coupon of 10%, payment twice a year. This means that the investor will receive income of 100 rubles in two payments of 50 rubles each.

Types of bonds

By Revenue Method

According to the method of obtaining income, bonds are divided into:

• coupon
• couponless (discount)

Under the coupon bond, the issuer pays money (coupon) at regular intervals. Payments on bonds can be made once a year, once in half a year, once in a quarter - this is a coupon period. Coupon income is accrued every day, but is paid only on the date of the coupon, which is known in advance. The money comes into your account usually 2-3 days after the coupon payment date.

The amount of coupon income that has accumulated for the coupon period, but has not yet been paid, is called accumulated coupon income (NCD). After the coupon is paid, the NKD is reset to zero and begins to accumulate again.

If you buy a bond, you must pay the seller of the NKD, which has accumulated by the day of the transaction, thereby compensating him for the lost income (since he loses the coupon when selling). If you sell a bond, then the buyer pays the IDC to you.

For example, the coupon value is 40 rubles, the coupon payment period is 182 days (once every six months). Let's say 3 months (90 days) have passed since the last coupon payment, in this case the tax code is equal to 20 rubles.

The coupon on a bond can be fixed and variable. For a bond with a fixed coupon, the amount of the coupon for the entire period of payments is constant, for a bond with a variable coupon, the amount may change.

The value of the variable coupon is tied to some basic interest rate, for example, LIBOR (international interbank loan market rate) or refinancing rate, and is set as a base rate + some other percentage (surcharge). Since the base rate can change over time, the size of the coupon will also change. For example, the coupon value is calculated as a base rate of + 2 percentage points. In the first year, the base rate is 3%, which means the coupon size is 3 + 2 = 5%, in the second year 3.5 + 2 = 5.5%.

On discount bonds, the coupon is not paid, the investor receives income due to the fact that the bond is sold below par (at a discount). For example, the company sells a bond with a face value of 1000 rubles for 900. Due to the difference between the sale price and the repayment price, the investor receives income.

By Collateral Method

According to the collateral method, bonds are divided into:

• secured (mortgages) - to increase the reliability and attractiveness of its securities, the company can issue secured bonds, payments on which are guaranteed by some assets. Real estate (mortgage liabilities), property, loans, securities and other assets can act as collateral. In the event of bankruptcy, these assets can be sold and go to pay off bond obligations.

• unsecured (unsecured) - unsecured bonds are not secured by any assets, and the guarantee of payments depends only on the general solvency of the company.

By Issuer Status

By issuer status, bonds are divided into:

• government - issued by the government, in Russia government bonds are called OFZ (Federal Loan Bonds) and issued by the Treasury Department, in the USA they are treasury bonds or treasuries (treasuries)
• municipal - issued by local (regional) authorities, for example, bonds of the Moscow region
• corporate - issued by commercial companies, such as Sberbank bonds

FEDERAL LOAN BOND

Main item: OFZ (Federal Loan Bonds)

Eurobonds of Russia

• Eurobonds of Russia

US government bonds (Treasurys)

Main article: US government bonds (Treasurys)

Who and how allows the United States to live on debt for decades.

By Repayment Type

By type of repayment, bonds are divided into:

prepaid - under such bonds, the issuer has the opportunity to repay them ahead of schedule until the maturity date

• revocable - the right to early repayment of the bond belongs to the issuer
• refundable - the right to repay the bond ahead of schedule belongs to the investor
• amortized - the issuer during the term of circulation of the bond gradually pays its face value in installments in order to reduce the amount of payments at the time of repayment
• irrevocable - bonds are redeemed once on a fixed date

By convertibility

By convertibility, bonds are divided into:

• convertible - an investor has the right to exchange bonds for a certain number of shares or other bonds of the same issuer
• inconvertible

On the indexation of payments

According to the indexation of payments, bonds are divided into:

• indexed - the amount of payments is adjusted depending on changes in some indicator, for example, the inflation rate
• not indexed

Income bonds

A separate group is income bonds. For income bonds, the company has the right to pay interest income only if there is a profit. Income bonds are divided into:

• simple - the company is not obliged to reimburse unpaid income in the future
• cumulative - unpaid income accumulates and the company will be obliged to pay it in the future

Produced abroad

If a company issues bonds abroad, then they are divided into:

• foreign bonds - issued on the market of another country in the currency of this country
• Eurobonds - placed simultaneously on the markets of several European countries at once and also in foreign currency

Profitability

2023: US and allies bond sell-off after Russia conflict breaks out

In early October 2023, the world's largest government bond markets underwent a powerful sell-off: bond yields reached post-crisis highs around the world: the yield on 30-year US bonds reached 5% and then retreated. German bond yields reached 3%. After the outbreak of the conflict with Russia, many governments have to pay much more for the opportunity to service their gigantic debts.

There is a growing sense that interest rates in the US and its allies will remain high for a long time to contain inflation.

2019: Negative yields on junk bonds in Europe

In July 2019, negative yields begin to take hold in the European junk bond market.

That is, you have a bond that nobody needs, and you pay money for keeping a bond that nobody needs.

The global volume of negative-yielding securities hovers around $12.8 trillion, according to Bank of America Merrill Lynch.

Corporate bond defaults

Main article: Corporate bond defaults

Taxation of bonds

2017: Personal income tax exemption

President Vladimir Putin in December 2015, in his annual address to the Federal Assembly, asked the government to submit proposals for the development of the corporate bond market and to exempt from taxation, including personal income tax, coupon income on bonds.

On March 22, 2017, the State Duma of the Russian Federation adopted a law on the exemption of individuals and legal entities from paying personal income tax from coupon income received from circulating ruble bonds of Russian organizations, if these bonds were issued in 2017-2020.

The law was adopted under the name "On Amendments to Chapter 23 of the Second Part of the Tax Code of the Russian Federation."

Coupon income on such bonds is subject to personal income tax only if the amount of the coupon exceeds the amount of interest calculated based on the nominal value of the bonds and increased by 5% of the refinancing rate of the Bank of Russia, effective during the period for which the income was paid.

Income in the form of a discount, obtained upon repayment of bonds denominated in rubles and issued in 2017-2020. bonds of Russian organizations, are also exempted from paying personal income tax without restrictions on the amount.

"The proposed measures will ensure the equalization of the conditions for taxation of interest income of individuals from investments in deposits in banks and in circulating bonds of Russian organizations," the explanatory note to the document says.

The law comes into force 30 days after its official publication, but not earlier than the first day of the next tax period on personal income tax.

Until 2017, personal income tax was charged 13%

The income of individuals on bonds is taxed at 13%. The tax is paid on coupon income and on income from the sale of bonds. The tax on coupons is paid by the issuer himself, that is, money comes to your account already "clean." Sales income tax withholds your broker by debiting your account at the beginning of the year or when you withdraw funds.

The tax base when selling bonds is calculated as follows:

(Income from sale + NAC received) - (Purchase expenses + NAC paid) + Coupon income

Tax base for redemption of bonds:

Bond Face Value - (Purchase Expenses + NCD Paid) + Coupon Income

A conditional example: they bought a bond at a price of 99% - 990 rubles, NKD at the time of purchase 5 rubles, which means the cost of buying 990 + 5 = 995. Coupon 40 rubles. After some time, they sold at a price of 99.5% - 995 rubles, NKD 10 rubles, which means income from the sale of 995 + 10 = 1005. Income 1005-995 = 10 rubles. Tax = 10 * 0.13 = 1.3 rubles. Coupon tax 40 * 0.13 = 5.2 rubles, that is, the account will receive not 40 rubles, but 34.8 rubles. Coupon income tax is withheld immediately upon receipt of income into the account. The broker will withhold income tax on transactions early next year or when withdrawing funds from an account.

The tax base is reduced by the amounts of actually incurred and documented expenses related to the acquisition, storage, sale and repayment of securities.

The following personal income from securities transactions is not taxable:

• coupon yield on government interest-bearing bonds (OFZs) for the time of ownership of the security by an individual;
• coupon income on interest bonds of the constituent entities of the Russian Federation and local governments.

How to choose and buy bonds

Main article: How to choose and buy bonds

Chronicle

2024: Of the 40 trillion rubles of bonds, 22 trillion falls on public debt. Foreign exchange bonds increased by $40 billion

The Russian debt market is stable by April 2024, borrowing is growing, but the structure is changing.

The volume of ruble bonds at the outstanding balance is 40.7 trillion rubles, including credit institutions - 2.72 trillion, other financial institutions - 7.5 trillion, government bodies - 22 trillion, non-financial organizations - 8.4 trillion.

Foreign exchange bonds increased by almost $40 billion from February 22 to $56 billion, largely due to replacement bonds.

From the beginning of the conflict in Ukraine to March 2024, inclusive, the net issue of ruble bonds for all issuers amounted to 8.6 trillion or an average of 330 billion per month, over the past 12 months - 5.1 trillion, since the beginning of the monetary policy tightening cycle - 2.84 trillion (406 billion per month), and since the beginning of the year - 674 billion.

For comparison, from 2017 to 2021 inclusive, the average monthly net issue was 285 billion, but then the purchasing power of the ruble was different. At face value, the pace has grown by 15% since the beginning of the special operation in Ukraine, and taking into account inflation, it fell by 15%.

The tightening cycle of monetary policy did not affect either corporate lending or the debt market - the increase in lending and debt in bonds is comparable to the peak period in low rates in 2022-2023.

From 2022, the main increase in debt occurs in the public debt and in other financial organizations, while non-financial business does not increase debt.

• The state increased debt in bonds by 5.1 trillion from the beginning of the SVO, 2.1 trillion for the year, 1.1 trillion from Sen.23 and 450 billion from the beginning of 2024. The average monthly pace in 2017-2021 was 171 billion and increased to 195 billion from Feb. 22.

• Other financial institutions increased obligations by 3.6 trillion from Feb. 22, 2.6 trillion per year, 1.43 trillion from Sen.23 and 113 billion from the beginning of 2024. The 5-year pace until 2022 was about 28 billion growth per month, and from 2022 increased to 140 billion.

• Non-financial companies practically did not make net borrowings - only 50 billion from February 22, 274 billion per year, 300 billion from September 23 and only 40 billion from January 24. For comparison, in 2017-2021 the average monthly increase was 61 billion, and from February 22 it fell to 2 billion!

2023

The Russian corporate bond market grew by 5 trillion rubles over the year - this has not happened for 10 years

The Russian corporate bond market in 2023 grew by 5 trillion rubles compared to 2022 and reached 23.9 trillion rubles. There has been no such rise for 10 years, according to the materials of the Central Bank of the Russian Federation, published on January 17, 2024.

As the regulator notes, a significant contribution to the market was made through the placement of replacement bonds and bonds nominated in yuan.

Financing in yuan in Russia is becoming more expensive. Borrowing costs are rising as exporters need to refinance debt.

In December 2023, the volume of the corporate bond market at an outstanding face value increased by 1.56 trillion rubles, to 23.9 trillion rubles. In relative terms, it increased by 7%, which was the largest monthly growth rate in 2023. At the same time, in November there was a slight decrease in the market volume - by 0.1%.

According to the Central Bank, in the corporate bond market, the average daily volumes of secondary exchange trading in December 2023 increased, amounting to 21.8 billion rubles a day (in November - 16.5 billion rubles). Indicative corporate bond yields (RUCBTRNS) rose only three basis points to 13.85% in December compared to November. The yield of OFZ with a comparable duration increased by 95 b. p. Up to 12.51%, specified in the document.

Economists previously predicted that the volume of new placements on the ruble corporate bond market in 2023 could become a record and exceed 5 trillion rubles. HSE In their report, they noted an increase in the demand for corporate bonds with the need to raise funds for the implementation of investment programs and refinancing obligations in closed foreign markets.

Managing Director of the NKR Dmitry Orekhov considers their advantages to be another driver of the corporate bond market: the absence of sanctions risks, protection against the devaluation of the ruble, high yields in foreign currency and good quality of issuers.

FINANCIAL MARKET RISK OVERVIEW

Of the 36.1 trillion rubles of debt in the domestic market, 20 trillion falls on government bonds

As of May 2023, the volume of issued debt securities in the domestic market Russia at par value is 36.2 trillion for bonds denominated in, rubles of which 36.1 trillion, i.e. almost all are bonds with a maturity of more than one year.

20 trillion - public debt, 8.2 trillion from non-financial companies, 2.7 trillion from banks, 5.1 trillion from other non-financial companies.

In the coming year, ruble bonds of 2.2 trillion are suitable for repayment, of which 1.5 trillion are from the federal government.

The central bank has changed the accounting and display methodology, which leads to slightly different conclusions, Spydell Finance wrote.

In January-April 2023, the balance of ruble bonds on outstanding debt increased by 1,042 billion, of which the federal government accounted for 826 billion, credit institutions - plus 46 billion, other financial institutions - plus 253 billion, and for non-financial organizations - minus 22 billion.

Since August 2022, when the Russian debt market thawed, the volume of ruble bonds on outstanding debt has grown by 4.6 trillion, of which 3.5 trillion fell on the state, and non-financial companies did not borrow.

The debt market in Russia is working, but a little in the wrong direction. Issued debt securities in foreign currency at face value amount to 3.6 trillion in ruble equivalent for all issuers and all the increase occurred in the last 10 months.

Back in June 2022, bonds of Russian issuers in foreign currency were 900 billion and increased by 2.7 trillion, where non-financial companies increased debt in bonds by 833 billion, and mysterious other non-financial organizations immediately by 1.7 trillion. The state does not borrow in foreign currency now, but insignificant changes in the bank.

Formally, the debt market works, but in what currency is the debt placed? There is no answer, and the Central Bank does not comment in any way. And that these are "other financial institutions" that vacuum the entire market and are the main issuer of bonds in Russia?

It is curious that there is essentially no demand for ruble debt, since almost the entire issue in state funds, which were mainly bought by banks.

Digital mortgage securities platform launched in Russia

On February 7, 2023, Дом.РФ announced the launch of a digital mortgage securities platform (ICB), which allows original banks to apply for securitization, as well as download and check regular reports as part of mortgage pool service. The project was implemented with the participation of the FinTech Association. Read more here.

2022

Gazprombank became the leader in the Russian debt market

In 2022, the leader changed on the Russian debt market for the first time in 5 years. Gazprombank bought the most debts, the study said. Cbonds

As Kommersant writes with reference to this report, in 2022 Gazprombank participated in the organization of 96 issues worth more than 271 billion rubles. Sberbank (SberCIB), which was in the lead in 2021, dropped to second place a year later with 247.6 billion rubles.

VTB Capital, which took second place in 2021, dropped out of the five largest organizers. The third place with an indicator of almost 200 billion rubles was retained by BC Region, the fourth was taken by Дом.РФ Bank (in 2021 it was in 8th place), over the year the company placed almost 171 billion rubles. The top five, as in 2021, was closed by Sovcombank with a result of 141.2 billion rubles.

The redistribution of places is associated with Western sanctions against the largest Russian credit organizations, Kommersant notes. Due to the increased risk, some issuers began to give preference to investment banks that did not fall under restrictions.

However, the isolation of the Russian market makes secondary sanctions less dangerous, so as the local debt market transforms, the role of state banks will be restored, its participants say.

In 2023, we should expect an increase in the number of placements of third-tier companies and high activity of issuers who historically entered the Eurobond market, believes Eduard Dzhabarov, Managing Director for Debt Capital Markets of the Investment Activities Department of Sberbank.

Issuers do not have the opportunity to attract financing through Eurobonds, so companies will be more actively placed on the local Russian market, "adds Oleg Karpeev, director of issuers at Sinara Investment Bank[1]

Total ruble debt for the entire existence of Russia - 80.3 trillion rubles, of which 7.8 trillion are corporate bonds

80.3 trillion rubles - just such a ruble debt was created by the Russian financial system for the entire period of its existence at the end of 2022.

In the structure of this debt, 51.9 trillion rubles (44.1 trillion bank loans + 7.8 trillion corporate ruble bonds) were distributed among the non-financial sector in Russia (companies) and another 28.4 trillion rubles among the population (all types of lending in favor of individuals).

10 years ago, corporate bonds accounted for only 8% of the business debt structure, by February 2018 they reached 16% and remained at about this level by the end of 2022 (the maximum was 18.1% in January 2021).

In bonds, corporate debt has grown 4 times in 10 years, twice in 5 years, but the last year the trend is negative (until November 2022).

For advanced economies, the main source of business funding is corporate bonds, which reach 75-95% in the structure of the largest corporations. For all public companies (they are the right to issue bonds), the share of the bond is on average 60%, and for all companies, taking into account small and medium-sized businesses, about 40-45%.

In this sense, Russia is still three times behind the United States in terms of the development of the open market, as the main source of business financing.

The placement of corporate bonds in Russia decreased slightly to 3 trillion rubles

In 2022, corporate bonds worth more than 3 trillion rubles were placed in Russia (excluding short-term, "replacement" and yuan bonds), which is 0.2 trillion rubles lower than the record figure in 2021. This is evidenced by Cbonds data, which is cited by Kommersant on January 11, 2023.

In December 2022 alone, more than 0.86 trillion rubles were raised, which is almost twice the result of a year ago. This is the second largest result in the history of the Russian debt market, the newspaper notes: the company borrowed more funds in December 2020, when issuers raised over 1 trillion rubles.

Alexander Yermak, chief analyst of debt markets at BC Region, said that in December the yields of short OFZs returned to comfortable levels of 8% per annum, which are used as a benchmark for borrowing by corporate borrowers.

In a situation of uncertainty, issuers prefer to borrow as long as the market allows them, "said Denis Leonov, head of the debt capital markets department at BCS Global Markets (BCS GM).

During 2022, corporate bond yields grew unevenly following the dynamics of the Central Bank of the Russian Federation and OFZ rates. According to the Cbonds CBI aggregated yields index for companies of the first (ruAA- and higher rating) and the second (ruBBB - ruA +) echelons, the average level of yields increased by 300 and 500 bp, respectively. Of greatest interest is the expansion of credit spreads for these categories of issuers, whose average level reached peak values ​ ​ in 2022.

The situation in the secondary market has severely limited the possibility of conducting initial offerings, where investors, as a rule, require a higher level of profitability even in normal market conditions. When analyzing transactions of first-class issuers that entered the market in 2021 and 2022, experts note that in general, credit spreads have more than doubled in initial placements in some cases.^[2]

Bond Information Sources

You can find out the face value, market price, coupon rate, maturity date and other parameters of bonds traded on the Russian market on the websites of the Moscow Exchange, Rusbonds.ru^[3].

See also

• Investing in gold
• Investment in silver

Notes