Global investors fled Russian government bonds after Russia’s invasion of Ukraine Wednesday night — sending the yield on the dollar-denominated debt skyrocketing as high as 19%.
The big picture: Holders of the dollar bonds in the U.S. and Western Europe sold en masse in part because of the possibility that upcoming sanctions could restrict their ability to hold them. As bond prices go down, the yield goes up.
- But the overarching driver of the selling is that, at least in the West, continuing to lend to Russia just isn’t a good look these days.
Why it matters: The country will now have to rely more heavily on domestic investors for its funding needs. The first round of U.S. sanctions restricted activity in Russian government bonds issued after March 1, 2022.
- Yes, but: Russia's domestic, or "local currency," bond yields also shot up. The 10-year note went from 10% Wednesday morning to as high as 14% during the day on Thursday, before retreating a bit, says Jonas Goltermann, senior markets economist at Capital Economics.
Yields on Russia's domestic bonds — which are bought largely by investors and savers within the country — rose partly because of growing expectations that Russia's central bank will hike rates again in an effort to head off a currency crisis.
- It's more than that, though: "It's an indication that domestic investors aren't particularly thrilled about the military action. It's a sign that local financial markets are not functioning," Goltermann says.
Where it stands: In the short term, Russia doesn't need to raise more debt, meaning it can tolerate the unusually high cost of capital that the market's assigning it. It's amassed $630 billion in reserve assets that will help fund its needs for a while.
- But if sanctions crimp its economy — and its tax receipts — and an extended war in Ukraine gets expensive, things could eventually turn rough.
The bottom line: "Russia has a much stronger balance sheet than in the last crisis, when they went into Crimea, but there's no balance sheet that makes you completely safe or insulated from this kind of situation," Goltermann says.