However, he draws attention to the fact that the presence of foreign investors will also mean added volatility for the government bonds market.
“The 5.4% yield on government bonds in lei surprised us all. In the very short term it could also see a technical rebound. We did not expect to see such a strong decline of yields, the general trend was easy to discern, but the level reached in such a short time and the high volumes attracted in the last bond issue surprised us,” Mihail Ion told ZF Live.
RAM is the second largest fund manager in Romania, with assets of RON3.6 billion under management.
Through the funds it manages, the company is one of the largest local investors on the government bonds market. In the last part of 2012, the company’s new investments in government bonds were worth over EUR150 million.
The decision of US bank JP Morgan to include government bonds in lei in one of its indexes sparked euphoria among local and foreign investors, with the leu strengthening against the euro by 1.2% in a single day, and the yield paid by the Finance Ministry to issue five-year bonds abruptly fell by 1.2% from 6.7% to 5.4% per year.
One euro traded at RON4.348 on Monday after last week the exchange rate had stopped at around 4.33 units to the euro, i.e. a one-year low after the state managed to borrow RON3.1 billion in one single auction at a historic yield of 5.4% a year. Last summer, under the pressure of political instability, the leu hit a low against the euro, with one euro being worth RON4.6.
“This very significant strengthening of the leu has to do with capital inflows and less with the country’s economic fundamentals. I don’t think fundamental changes have occurred in the economy in the last few months. Perhaps even at RON4.65 per euro the leu was too weak, but the political instability was not at all encouraging for the financial markets,” Mihail Ion said.
Alongside major foreign capital inflows, another benefit of the inclusion in the JP Morgan index is the diversification of the investor base on the local market of government bonds, so far dominated by central bank BNR and by Romanian commercial banks.
“We should have more diversified investors on the market of government bonds, which finance Romania’s budget deficit in this way. On foreign currency-denominated government bonds, the share of non-resident investors is 25% and I think we will reach a similar share for leu-denominated government bonds,” Mihail Ion said.
He added that the inclusion in the index has also generated a change in the investor “quality” by increasing the exposure to government bonds with longer maturities.
“Up until recently the bulk of non-resident investors had exposure to T-Bills, i.e. short-term securities, now we are seeing an increase in exposure to government bonds, whose maturities are longer.”
One disadvantage of the presence of foreign investors on the market of government bonds is the higher volatility, i.e. the risk of having major price fluctuations for government bonds and therefore yield fluctuations.
(English version by Daniela Stoican)