15 High Rate Bond Issues.

What bonds to buy in 2023: 15 reliable issues with a high rate

The debt market in 2022, despite the dramatic events, managed not only to survive, but also come out in the black. Will bonds be able to remain a safe haven in 2023 and what events will affect them, experts said

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The material is for introductory purposes only and does not contain individual investment recommendations.

The Bank of Russia has set its key rate at 7.5% since September 16 and left it unchanged at two subsequent meetings, in October and December.

How the key rate of the Central Bank changes, October 14, 2013 - December 16, 2022 (Photo: RBC)

Meanwhile, inflation fell to 12.63% in October from September's 13.68% and to 11.98% year-to-date in November. As of December 26, inflation was 12.19% year-on-year.

Photo: Bank of Russia

What awaits the bond market in 2023

How the key rate and inflation will affect the bonds

The Russian economy continues to adapt to work in conditions of old and new western sanctions, which does not yet allow us to say with certainty about the path it will take in 2023, said Vladimir Malinovsky, head of debt market analysis department of brokerage company "Otkritie Investments". "On the one hand, the Bank of Russia forecasts inflation at 5-6%, which opens up the possibility to further reduce the key rate. On the other hand, the Central Bank speaks about remaining among the population pro-inflationary moods, the probability of expansion in 2023 of budget deficit and growth of volume of borrowings of the Ministry of Finance on the open market", - reminds Malinovsky.

He draws attention to the fact that the decline in hydrocarbon exports, as well as a potential decline in prices for key commodities in the global market may lead to changes in the current account, which will put pressure on the ruble and, possibly, on inflation.

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"These two scenarios imply diametrically opposite bond market reactions and, accordingly, investment strategies. Taking into consideration the possible risks, we believe that it is a good idea to start next year with a sufficiently conservative portfolio in order to adapt it later on depending on the development of the situation. Such a portfolio may include relatively short bonds with maturity about a year of high-quality corporate issuers with rating A and above, OFZ issues with variable coupon (OFZ-PC) and linkers (OFZ-IN), as well as dollar or euro replacement bonds," the expert believes.

Portfolio manager of Alfa Capital Yevgeny Zhornist expects a decrease in the key rate, which will entail a decrease in the yield of OFZ with different terms to maturity. "The slope of the OFZ curve will decrease, primarily due to a decrease in long yields. In general, the debt market will grow," says the expert.

Yevgeny Zhornist, a portfolio manager of Alfa-Capital Management Company, expects a decrease in the key rate, which will entail a decline in the yields of OFZs with different maturities to maturity. "The slope of the OFZ curve will decrease, primarily due to a decrease in long yields. In general, the debt market will grow," says the expert.

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New placements in the debt market

In the fourth quarter of 2022 the activity of the first tier at the market of primary placements increased significantly. Corporations offered securities mainly with a comfortable maturity of two or three years and at a premium to the market. "The activity of first-tier companies' bond offerings in the domestic market in 2023 will probably only increase," VTB My Investments analysts believe.

Evgeniy Zhornist expects new issuers in the market and continuation of replacements of Eurobonds. He does not exclude placing bonds in different currencies, but if the base currencies will be dollar or euro, redemption and coupon payments will be made in rubles.

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Tinkoff Investments also forecasts a large number of primary placements in the ruble segment in 2023 to refinance debt. "In addition, the trend will continue to increase borrowing in the yuan, large borrowers will place more and more foreign currency bonds, as the cost of borrowing in this currency is significantly lower," said credit analyst at Tinkoff Investments Mikhail Ivanov.

The main volume of primary placements will be concentrated in the first tier, issuers with lower credit quality will have to compete for the funds of investors, believes expert on the stock market "BCS World Investment" Igor Galaktionov. "The Ministry of Finance may be active at primary auctions, which is disposed by the expected budget deficit. The agency may prefer long-term issues, due to which the steep slope of the OFZ curve will remain for most of the year," the expert added.

Risks of defaults

"In 2023, we will not see a crowd of deceived investors and mass defaults as we once did with a crowd of deceived depositors," said Mikhail Sukhov, CEO of the Analytical Credit Rating Agency (ACRA). According to him, ACRA does not see any grounds for systemic problems that the debt market may cause to investors in 2023. He argued the opinion of credit analysts by the fact that ¾ (or 73%) of the total volume of bonds that circulate in the market have a fairly high credit rating - A-and above. "For such securities, by definition, according to the models used by ACRA, the default rate cannot be higher than 1%," Sukhov said.