We have identified a medium term Aa3 JP Morgan bond denominated in Russian rubles maturing in June 2017, with an over 8.0% yield for our clients.
Corporate Bond linked to the Russian Ruble
JP Morgan Chase has bonds, denominated in Russian Rubles, which currently have a yield of about 8.2% for 70 months. The high yield and medium length maturity of this ruble bond, when considered with its reputable Aa3 rated issuer, compares very favorably with other high yielding instruments in our Foreign and World Fixed Income holdings, and we view the most recent weakness in the ruble as an opportune time for adding it to our basket of foreign fixed income holdings. We believe the dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against its devaluation and a further erosion of its buying power, and we view the recent European debt concerns to have unduly weakened the Russian Ruble. The resulting strength of the dollar appears to have presented a great opportunity to diversify into the Russian economy, which continues to show remarkably good growth potential in spite of the recent financial turmoil.
US Debt Woes
Today Fitch Ratings affirmed the country’s top notch AAA rating (following Standard & Poor’s decision over 10 days ago to downgrade US Treasuries,) but cautioned that could change depending on developments in Washington and the broader economy. The Treasury Department called on Congress to act on additional deficit reduction. Yet, the Obama administration and Republicans in Congress, while agreeing that budget deficits have become unsustainable, have not agreed on specific cuts that will bring spending and revenue into balance.
Meanwhile, the money supply appears to have gone parabolic while credit appears to be shrinking. When money sits idle, it bears little effect on the overall economy other than to push short term money market rates down. But evidently the point of diminishing returns is such a distant memory that savers are now unconcerned enough about whatever minuscule yields are being offered elsewhere, that paying a bank (such as Melon bank in New York) to “preserve” what they already have begins to make sense. And while that may make sense to some, it doesn’t to us, especially while considering the 46% increase in (M1) money in just a little over 3 ½ years, with last month (July) showing an over 50 billion dollar increase alone.
In any event, in our effort to diversify and protect our client’s assets against the dollar’s likely continued devaluation, we here at Durig Capital scour the globe in search of sound investments in a basket of global currencies, and it is why we have chosen this superior yielding JP Morgan’s Russian ruble denominated bond as This Week’s Best Bond.
Russia has undergone significant changes since the collapse of the Soviet Union, moving from a globally-isolated, centrally-planned economy to a more market-based and globally-integrated economy. Economic reforms in the 1990s privatized most industries, with notable exceptions in the energy and defense-related sectors. The Russian export industry consists primarily of natural gas to the Euro zone, is the world’s second largest exporter of oil, and is the third largest exporter of steel and primary aluminum. This reliance on commodity exports makes Russia vulnerable to boom and bust cycles following the highly volatile swings in global commodity prices, and provides reason for the higher correlation of its currency to oil prices.
The economy had averaged 7% growth since the 1998 Russian financial crisis, resulting in a doubling of real disposable incomes and the emergence of a middle class. The Russian economy, however, was one of the hardest hit by the 2008-09 global economic crisis as oil prices plummeted and the foreign credits that Russian banks and firms relied on dried up. The economic decline bottomed out in mid-2009 and the economy began to grow in the first quarter of 2010. Growth for 2010 was 4%, and unemployment in Jun declined to 6.1 %. Capital markets are relatively small but growing and are dominated by energy companies. 2011 estimates for GDP growth were recently reduced to 4.2%.
Russia’s competitive flat income tax rate and low corporate tax rates support innovation, although private enterprises also must cope with “informal taxes” such as bureaucratic hassling and corruption. Other taxes include a value-added tax (VAT) and a regional property tax. In the most recent year, overall tax revenue as a percentage of GDP was 34.1 percent. In the most recent year, total government expenditures, including consumption and transfer payments, increased slightly to 34.1 percent of GDP. The state maintains a strong presence in such key sectors as energy and mining. Public debt is at 11 percent of GDP ($1.465 trillion in 2010), while inflation slowed to 9%.
|Country||Debt to GDP||2010 GDP growth||Unemployment Rate|
|Russia||11.0 %||4.0 %||6.1%|
|United States||92.7 %||2.8 %||9.2 %|
About JP Morgan Chase
JPMorgan Chase & Co. is one of the oldest financial institutions in the United States, with a history dating back over 200 years, and is built on the foundation of more than 1200 predecessor institutions. The Firm is a leader in investment banking, financial services for consumers, small-business and commercial banking, financial transaction processing, asset management and private equity. It operates in more than 60 countries with over 200,000 employees, and its assets total $2.2 trillion.
Last month, JP Morgan reported second-quarter 2011 net income of $5.4 billion, compared with net income of $4.8 billion in the second quarter of 2010. Earnings per share were $1.27, compared with $1.09 in the second quarter of 2010.
Commenting on the Firm’s balance sheet, CEO James Dimon said: “We maintained our fortress balance sheet, ending the second quarter with a Basel I Tier 1 Common ratio of 10.1%. Our strong and growing capital base enabled us to buy back $3.5 billion of stock during the second quarter, and we will continue to buy back stock opportunistically. We estimate that our Basel III Tier 1 Common ratio was approximately 7.6% at the end of the second quarter. This level is well in excess of what is required today under existing rules and is greater than the level we expect will be required under the proposed rules for up to five years, including the additional buffer for global systemically important financial institutions. Our strong capital position and significant earnings power will allow us to actively grow our business and rapidly meet any proposed Basel III requirements as they are phased in. We intend to keep our capital ratios approximately where they are as we do not see a need to manage to higher ratios ahead of time.”
In concluding, Dimon stated that they continue to see substantial opportunities for the company building up their international presence, with more bankers, branches and products to serve our multinational clients where they want to be served. JP Morgan Chase’s senior unsecured debt is rated Aa3 by Moody’s, A+ by S&P, and AA- by Fitch.
|J P Morgan bonds||Interest Rate||Ratings||Maturity|
|Russia Linked||7.5+ %||Aa3/A+/AA-||June of 2017|
|United States||3.58 %||Aa3/A+/AA-||July of 2017|
|US Treasury .||2.21 % .||Aaa/AA+/AAA||August of 2021|
These JP Morgan bonds, linked to the Russian ruble, have about a 4% higher yield than their very comparable US obligation. The Russian linked bond spread is over 5% measured against the longer 10 year bench mark US Treasury bond, indicating a 339 % yield improvement with 4 year shorter bond.
The default risk is JP Morgan’s ability to perform. Considering JP Morgan’s highly experienced and outstanding management team (led by James Dimon), its proven leadership role throughout the 2008 financial crisis that set them above many of their peers, and it’s quality Aa3/A+/AA- credit ratings, it is our opinion that the default risk is very minimal relative to the currency risk of the Russian ruble.
The currency risk could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to Russia’s economy.
Russia’s long-term challenges include a shrinking workforce, a high level of corruption, difficulty in accessing capital for smaller, non-energy companies, and poor infrastructure in need of large investments. The Russian economic decline bottomed out in mid-2009 and the economy began to grow in the first quarter of 2010. However, a severe drought and fires in central Russia reduced agricultural output, prompting a ban on grain exports for part of the year, and slowed growth in other sectors such as manufacturing and retail trade. Higher oil prices, which buoyed Russian growth in the first quarter of 2011, could help Russia reduce the budget deficit inherited from the lean years of 2008-09.
How can investors participate in Russian ruble denominated bonds? Achieving an institutional sized yield typically requires an institutional sized bond purchase. To facilitate attaining a more attractive yield, here at Durig Capital we bring together many retail bond buyers into a single much larger institutional sized trade. In this week’s syndicate, we anticipate being able to accommodate purchases as low as $ 5,000 US Dollars should that the level that best fits with your interest. So the answer to the question is simple – contact your Durig professional.
While acknowledging that every investment vehicle involves varying elements of risk, we believe that this recent strengthening of the US dollar relative to the Russian ruble represents an extremely attractive opportunity for initiating a moderately longer term exposure to the Russian economy with a well respected issuer, at a very attractive yield. A continued demand for Russia’s abundant supply of oil and natural gas will likely result in a continued strengthening and expansion of their economy, which in turn is likely to result in the strengthening of the ruble currency, which we believe is one of the currencies more highly correlated to the price of oil. Therefore, we view the ruble currency risk of this prominent emerging market as an unusual and significant opportunity that we have highly recommended our clients take in their continued effort to diversify away from overweighted US dollar based assets, and it is why we are adding it to our Foreign and World Fixed Income holdings.
Disclosure: Durig Capital clients may currently own these JP Morgan bonds.
To know more about this JP Morgan bond call our fixed income specialist at 971-327-8847.