Russian Government Bond Market Flashes Distress

Signs of distress are everywhere in the Russian bond market following the Russian invasion of Ukraine and the imposition of sanctions on Russia. A dramatic inversion of the dollar-denominated Russian government curve highlights the concern investors have of a near-term default. The credit default swap (CDS) market shows that the 1-year implied default probability is now a striking 56%, up from 3% prevailing just before the start of the conflict last week. Beyond the next year, the CDS market shows a much lower level of implied default probability, underscoring how default risk is front loaded in the current market.

Liquidity conditions for Russian debt have also seriously deteriorated, as illustrated below and in the latest edition of the MSCI Liquidity Risk Monitor . Bid-offer spreads have increased very significantly, with debt issued in hard currencies more significantly impacted than bonds denominated in rubles. Besides increasing bid-offer spreads, the number of dealers quoting Russian government bonds has decreased sharply. Investors may face difficulty liquidating their positions and may incur excessive transaction costs.¹

We will, as with all aspects of the financial ramifications of this crisis, continue to monitor markets and investor reaction.