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Banks are making big money off of Russian debt – CNN

The sell-off of Russian debt associated with Russian President Vladimir Putin’s campaign on Ukraine and the sanctions that have ensued have created a window for a new type of arbitrage that some in the finance world are gobbling up, se…….

The sell-off of Russian debt associated with Russian President Vladimir Putin’s campaign on Ukraine and the sanctions that have ensued have created a window for a new type of arbitrage that some in the finance world are gobbling up, seeing it as easy money.

The idea is what’s known as a negative-basis trade, or purchasing dirt-cheap Russian government or corporate bonds along with credit-default swaps which act as insurance on the potential default of a borrower.

Data from the website MarketAxess shows that Russian sovereign debt traded at a volume of $7 billion between February 24 and April 7, up from $5 billion in the same period in 2021 — a 35% uptick.

Russian bonds are trading furiously, said Philip M. Nichols, an expert on Russia and social responsibility in business and professor at the University of Pennsylvania’s Wharton School. “There’s a lot of speculators that are buying up these bonds that have been severely downgraded and are on the verge of becoming junk,” he said.

Nichols says he’s getting constant calls from analysts interested in the whether the potential trade makes sense. “The spread on Russian sovereign debt is astonishing right now,” he said. “They’re making an unusual amount of money with respect to the volume.”

The cost to insure Russian debt grew to 4,300 basis points on April 5, up from 2,800 the previous day.

At the same time bond rates fell drastically — with bonds maturing in 2028 trading at just $0.34 on the dollar. That means it could cost just over $4 million to insure $10 million of Russian securities, The Economist reported. Hedge funds like Aurelius Capital Management, GoldenTree Asset Management and Silver Point Capital have increased their exposure to Russian markets, mostly by purchasing corporate bonds, the Financial Times reported in late March. US financial institutions like JPMorgan Chase and Goldman Sachs are facilitating these trades, connecting clients who want to get out of their positions with hedge funds that have a higher risk tolerance for risk and less of a moral quandary about purchasing Russian debt.

“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 sort of a loophole they could exploit to make money.”

JPMorgan representatives say they are acting as middlemen, simply looking to aid clients. “As a market-maker, we have been helping clients reduce their risks and manage their exposures to Russia in the secondary markets. None of the trades violate sanctions or benefit Russia,” said a spokesperson.

If clients wanted to quickly unload their exposure to Russia they could look to Russian oligarchs who would happily buy back sovereign bonds, said Robert Tipp, chief investment strategist and …….

Source: https://www.cnn.com/2022/04/09/investing/russia-debt-wall-street-billions/index.html

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