10 High-Rate Bonds That Beat Deposits

The yield on corporate bonds is still higher than on OFZ and bank deposits. What risks await investors in Russian bonds, which of them remain reliable and profitable,

Corporate bond yields, which hit ten-year highs above 17% in March, have fallen to 12.7-13% in the last two weeks. Paper prices are rising, and yields, respectively, are falling against the backdrop of a key rate cut to 14%, which occurred on April 29. The Bank of RUSSIA is considering the possibility of lowering the key rate at the next meetings, which means that yields will continue to move down.

As of May 20, 2022, the yield of the RUCBITR Russian corporate bond index is 12.69% with a duration of 705 days (1.9 years).

The highest yield of the RUCBITR Russian corporate bond index over the past 10 years was recorded on March 30, 2022 at 17.29%. The extreme return of the index is 20.58%, set on January 20, 2009 (data on the index's returns are available from May 4, 2008).

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Federal loan bonds   in their prices already reflect the expected reduction in the key rate - the Russian government bond index RGBI has shown a yield of 10-11% since mid-April.

How to calculate the real yield of a bond: instructions Bonds , Coupon , OFZ , Key rate , Moscow Exchange

Bonds from the corporate bond segment now allow investors to buy securities that in the future will be able to provide yields above the inflation rate, for which the Central Bank expects to reach its 4% target in 2024, according to the regulator's May monetary policy report.

“Corporate bonds of reliable borrowers of the first and second echelons today allow fixing a yield of 11.5-13% per annum for one or two years. The credit spreads of these bonds are still wide - in the region of 150-300 basis points to OFZ. it should be taken into account that the primary bond market is inactive for the time being and there will be a gradual shortage of securities on the market as the planned redemption proceeds. Along with a decrease in the key rate, this factor may lead to a reduction in the credit premium of reliable corporate bonds to OFZ, respectively, to a decrease in their yield, ”explains the advantages of buying bonds at the moment, investment strategist at VTB My Investments   Alexander Polyutov.

Spread: how to make money for an investor, given the difference Spread , Trading , Stocks , Option , Bonds How to choose bonds to buy

The main factors that traditionally influence investment decisions on purchasing bonds are the key rate   , its comparability with current and projected inflation, as well as the credit quality of issuers   .

Interest risk

The interest rate risk in bonds is already more or less indicated: the Central Bank expects inflation for the year at the level of 18-23%. According to the Ministry of Economic Development, inflation in Russia in annual terms as of May 13, 2022 amounted to 17.69% against 17.77% a week earlier.

The key rate is currently set at 14%. “The current forecast range for the average key rate for 2022 is 12.5–14%, for the next one — 9–11%, and for 2024 — 6–8%,” Elvira Nabiullina, HEAD of the regulator, said following the last meeting of the Board of Directors of the Bank of Russia .

Change in the key rate of the Central Bank of Russia October 14, 2013 - April 29, 2022 (Photo: RBC)

Bank deposits, which are often compared to bond investments as their alternative, have steadily reduced returns. The average maximum rate on deposits of the top 10 Russian banks in the first ten days of May 2022 decreased to 12.1% per annum, according to the Bank of Russia.

“With high interest rates, it is more difficult for companies in all industries to refinance. At the same time, we are now witnessing a process of lowering rates in the economy, which creates more favorable conditions for the functioning of business. Small companies, companies with a high debt load, and businesses in their infancy are at greater risk. A thorough credit analysis of issuers is extremely important now,” warns Alfa Capital portfolio manager Evgeniy Zhornist.

OFZ: what it is, profitability and risks for investors Ministry of Finance , Central Bank , Bonds , OFZ

Credit risk (risk of defaults)

The analysis of the rating actions of the agencies Expert RA, ACRA, NKR, NRA, which was carried out by RBC Investments for the period from the beginning of 2022, does not yet show massive downgrades of quality issuers. However, this fact should not falsely reassure investors.

“While rating agencies have faster access to issuer information, it does not allow them to monitor the company on a day-to-day basis. Therefore, from this point of view, the position of the agencies is not much different from the capabilities of ordinary analysts and investors, and in many cases they have to make a decision to change their ratings already after the appearance of negative corporate news in the public domain. Given that companies, in most cases, are in no hurry to share emerging problems with the market, there is still quite a bit of such news, ”explains Vladimir Malinovsky, head of the debt market analysis department at Otkritie Investments.

Kirill Komarov, Head of the Investment Analytics Department at Tinkoff Investments, also draws attention to the specifics of compiling credit ratings from national agencies: “The rating reflects the position of a particular company in the general range of comparable organizations, that is, rating agencies compare the credit quality of companies with each other within the country. For this reason, if conditions worsened for all companies at once, then the relative probability of a company's default   did not change significantly.

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According to the Moscow Exchange, since 2018 defaults have been declared exclusively by companies of the third level of listing.

Number of defaults on bond issues admitted to trading on the Moscow Exchange

2018 - 8 issues; 2019 - 9 issues; 2020 - 17 issues; 2021 - 31 issues; 2022 (as of May 20) — 19 issues + 10 issues with technical default.

Investors have been warned about the risk of defaults on bonds of small business of the Moscow Exchange , Bonds , default

“At the moment, bonds of a state-owned company and systemically important players, who can count on support from the federal authorities and refinancing in banks, are preferable. Bonds of the largest commodity exporters, leaders in the telecommunications and grocery retail market, and state-owned banks do not cause concern,” says Alexander Polyutov, investment strategist at VTB My Investments. In his opinion, the credit quality of issuers focused on domestic consumer demand and significantly involved in the global supply chains of components and raw materials may come under pressure. “In these industries, a substantive and individual study of the reliability of borrowers is required,” Polyutov warns.

Will OFZs be able to replace deposits and save money during record inflation of the Central Bank, Moscow Exchange, Banking and Finance, Contribution, OFZ

Which bonds do investment strategists choose?

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Otkritie Investments takes a very cautious view of the current corporate bond market and favors relatively short issues whose issuers approached the crisis with strong credit metrics and a good supply of cash liquidity   . “Among corporate loans, we single out PIK BO-P03, SetlGrB1P1, System1P10, EuroplanB3,” says Vladimir Malinovsky.

In Tinkoff Investments, in the current conditions, they suggest taking a closer look at the papers of HYDROMASHSERVICE BO-03, PIK-Corporation-001R-03, RUSAL Bratsk-002R-01, Russian Aquacult-001R-01, Segezha Group-001P-01R, Qiwi Finance-001R -01, Beluga Group-BO-P04. At current prices, the annual yield on these bonds lies in the range of 13.4-16.8%.

In Alfa Capital, the top securities with a high degree of reliability and at the same time a fairly high yield included issues of bonds VTBSUBT1-5 (for qualified investors), Europln1R2, LSR BO 1R7, SamoletP10, SetlGrB1P4, EtalFinP03. The yield on these securities is from 14.35% to 27.03%.

All about bank deposits: rates, taxes, how to calculate profit Deposit, Contribution, Banking and finance, Profitability

The credit quality of the issuer should be carefully considered when choosing bonds (Photo: Shutterstock)

Top 10 Highly Rated Yielding Corporate Bonds

Sovcombank, issue BO-05 (Sovcom BO5)

ISIN: RU000A0ZYJR6 Maturity date: 11/25/2027 (06/01/2023 put offer) Yield: 18.75% (as of the put date) Coupon: 6.9% per annum (₽34.41, twice a year) Accumulated coupon income: ₽31.95 Bond price as of May 19, 2022: ₽899.80 Rating: companies — NKR AA-.ru, Expert RA ruAA, ACRA AA- (RU), bonds issue — Expert RA ruAA, ACRA AA- (RU)

Children's world, release BO-05 (DetMir BO5)

ISIN: RU000A1015A8 Maturity date: 12/01/2026 (12/06/2022 put-offer) Yield: 17.41% (by the put-off date) Coupon: 7.25% per annum (₽36.15, twice a year) Accumulated coupon income: ₽32.58 Bond price as of May 19, 2022: ₽952.20 Rating: companies—Expert RA ruAA-

Samolet group of companies, issue BO-P09 (Airplane1P9)

ISIN: RU000A102RX6 Maturity date: 02/15/2024 Yield: 17.4% Coupon: 9.05% per annum (₽45.13, twice a year) Accumulated coupon yield: ₽22.81 Bond value as of 05/19/2022: ₽887 ,90 Rating: companies — NKR A.ru, Expert RA ruA-, ACRA A- (RU), bonds issue — ACRA A- (RU)

Etalon Finance, BO-PO3 (EtalFinP03)

ISIN: RU000A103QH9 Maturity date: 09/15/2026 Yield: 17.26% Coupon: 9.1% per annum (₽22.69, four times a year) Accumulated coupon yield: ₽14.71 Bond value as of 05/19/2022: ₽820 Rating: companies - Expert RA ruA-, bond issues - Expert RA ruA-

Samolet group of companies, issue BO-P10 (SamoletP10)

ISIN: RU000A103L03 Maturity date: 08/21/2024 Yield: 17.14% Coupon: 9.15% per annum (₽22.81, four times a year) Accumulated coupon yield: ₽21.56 Bond value as of 05/19/2022: ₽869 ,90 Rating: companies — NKR A.ru, Expert RA ruA-, ACRA A- (RU), bonds issue — ACRA A- (RU)

Expobank, issue 001P-01 (Expo1P01)

ISIN: RU000A103RT2 Maturity date: 09/24/2024 Yield: 16.6% Coupon: 9% per annum (₽22.44, four times a year) Accumulated coupon yield: ₽12.82 Bond value as of 05/19/2022: ₽871.10 Rating: companies - NKR A-.ru, Expert RA ruA-, bonds issue - Expert RA ruA-

Setl Group Issue 001P-03 (SetlGrB1P3)

ISIN: RU000A1030X9 Maturity date: 04/17/2024 Yield: 15.94% Coupon: 8.5% per annum (₽21.19, four times a year) Accumulated coupon yield: ₽6.99 Bond value as of 05/19/2022: ₽892 ,5 Rating: company — ACRA A (RU), bond issue — ACRA A (RU)

PIK-Corporation, issue 001R-03 (PIK K 1P3)

ISIN: RU000A1026C1 Maturity date: 03/29/2023 Yield: 16.5% Coupon: 7.4% per annum (₽18.45, four times a year) Accumulated coupon income: ₽10.34 Bond value as of 05/19/2022: ₽935 ,5 Rating: companies — NKR AA-.ru, Expert RA ruA+, bond issues — Expert RA ruA+

Leasing company Europlan, issue 001P-02 (Europlan1P2)

ISIN: RU000A1034J0 Maturity date: 05/17/2024 Yield: 15.8% Coupon: 7.8% per annum (₽19.45, four times a year) Rating: companies — ACRA A+ (RU), bond issues — ACRA A+ (RU)

LSR Group (PJSC), issue 001P-07 (LSR BO 1R7)

ISIN: RU000A103PX8 Maturity date: 09/11/2026 Yield: 14.64% Coupon: 8.65% per annum (₽21.57, four times a year) Accumulated coupon income: ₽14.93 Bond value as of 05/19/2022: ₽857 ,00 Rating: companies — Expert RA ruA, bond issues — Expert RA ruA

The editorial selection of RBC Investments is made up of liquid bonds:

with a fixed coupon rate of at least 4%; with a duration of at least 182 days; having an issuer/issue (company/issue) rating not lower than A-.ru (according to the national scale of the NKR agency), not lower than A- (according to the national scale of the ACRA agency) and/or not lower than ruA- (according to the national scale Expert RA"); the yield is indicated according to the Moscow Exchange data as the yield at the price of the last transaction on May 19, 2022; when making a decision to purchase securities, the yield should be rechecked independently at the current moment; the accumulated coupon income is indicated as of May 19;

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

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A term that refers to the likelihood of an asset being sold quickly at or near the market price. Read more The main instrument of the country's central bank's monetary policy. This is the interest rate that determines the minimum value of money in the country, affects the rates of loans, deposits, the size of the coupon of traded bonds. The Central Bank influences inflation and exchange rates by changing the key rate. For example, if the key rate rises, then loans and deposits become more expensive, and inflation is contained. A person who issues securities. The issuer can be both an individual and a legal entity (companies, executive authorities or local governments). Default (from the French de fault - through fault) - a situation, arising from the default by the borrower of obligations to pay or service the debt. A default is the failure to pay interest on a loan or a bonded loan, as well as non-repayment of the loan. It is worth highlighting a technical default - a situation where the fulfillment of obligations was only a temporary delay in payments, as a rule, due to circumstances beyond the control of the borrower. A default serves as a basis for a creditor to file a claim for the bankruptcy of the borrower. In addition, the bond implies the right of the owner to receive a percentage of its face value or other property rights. Bonds are the equivalent of a loan and are similar in principle to the lending process. Both governments and private companies can issue bonds. Investment is the investment of money to generate income or to preserve capital. There are financial investments (purchase of securities) and real ones (investments in industry, construction, and so on). In a broad sense, investments are divided into many subspecies: private or public, speculative or venture, and others. More