The idea is what’s known as passive trade, buying cheap Russian government or corporate bonds along with default swaps, which act as insurance against a potential borrower’s default.
Data from the MarketAxess website shows that $7 billion in Russian sovereign debt traded between February 24 and April 7, up from $5 billion in the same period in 2021 — a 35% increase.
Nichols, an expert on Russia and social responsibility in business and a professor at the University of Pennsylvania’s Wharton School, said that Russian bonds are trading like crazy. “There are a lot of speculators who are buying these heavily downgraded bonds and they are on the verge of becoming junk,” he said.
Nichols says he gets constant calls from analysts who are interested in whether a potential trade makes sense. “The spread on Russian sovereign debt is staggering at the moment,” he said. “They make an extraordinary amount of money in relation to size.”
The cost of insuring Russian debt rose to 4,300 basis points on April 5, compared to 2,800 the day before.
“This is Wall Street,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “It doesn’t surprise me that they saw some kind of loophole they could exploit to make money.”
JPMorgan representatives say they act as intermediaries, simply looking for customer assistance. “As a market maker, we help clients reduce their risk and manage their exposure to Russia in secondary markets. None of the deals violate sanctions or benefit Russia,” a company spokesperson said.
If clients want to quickly eliminate their exposure to Russia, they can look to a Russian oligarchy that will be happy to buy back sovereign bonds, said Robert Tip, senior investment analyst and head of global bonds at PGIM Fixed Income. Selling Russian debt to US hedge funds keeps any accrued interest out of Russia’s hands.
The trade is legal and profitable, Nichols said, but is highly speculative and subject to significant fluctuations based on news of the Russian invasion of Ukraine and further sanctions.
It also illustrates a worrying disconnect between Wall Street and the actual state of the global economy: investors usually base their assessment of Russian debt on whether or not it will be repaid, and the likelihood of it being repaid depends on strength. the resilience of the Russian economy.
But this does not happen. New sanctions imposed by the US Treasury on Tuesday, which have blocked Russia’s access to any dollars it keeps in US banks, have greatly increased the chances that Russia will default on its debt and that its gross domestic product, the main measure of a country’s economic strength, would Significantly increases the chances of Russia defaulting on its debts. bog down.
The US Congress voted this week to rescind Russia’s most-favoured state trade status, a major economic cut that would pave the way for tougher sanctions and import controls on Russia’s essential products, such as chemicals and steel.
Nichols said that removing this status would cut off Russia’s integration into the global economy. He added that if Wall Street were connected to the real world, it wouldn’t want to be close to Russian debt.
“Russian debt is a high-risk area, and institutions should probably stay away,” Nichols said.
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