New agreement allows Kazakhstan to place bonds through Euroclear

ASTANA – The Kazakh Ministry of Finance, the Astana International Financial Centre (AIFC) and Euroclear Bank SA (Euroclear) have signed a memorandum on cooperation to develop a new international clearing system. The ministry will be able to place tenge bonds through Euroclear, the world’s largest bond clearing system.

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“Providing non-residents direct access to the market of government securities through Euroclear will allow placing treasury bonds of the Ministry of Finance in more competitive conditions and potentially reduce the cost of borrowing due to the expansion of the investor base,” said Kazakh Finance Minister Bakhyt Sultanov.

The memorandum defines the intention to work in partnership to support creating a corresponding market environment and conditions for foreign investors in Kazakhstan’s local securities through the Euroclear system.

The timing to connect Kazakhstan’s debt market with Euroclear’s settlement system is not specified.

A joint project on non-residents’ access to government securities is expected to launch by the end of June. In the first half of 2017, non-residents bought a record amount of treasury bonds in tenge and National Bank notes worth $603 million, increasing its portfolio in tenge by 10 times, according to regulatory statistics.

The main demand from non-residents is observed on financial controller’s short-term notes, which represent 92 percent of all investments in Kazakhstan’s public debt. The yield on government securities attracts foreign investors looking for the riskiest assets.

A similar trend has been observed in Russia, where the demand for ruble bonds attracts currency speculators from around the world. Kerry-trade, where speculators earn on the difference in interest rates, is one of the most popular investment strategies in the stock and currency markets. In practice, it is expressed in borrowing at low rates in one currency, then reinvesting those funds in another currency or its derivative at a higher interest income.

The average annual exchange rate of 331.22 tenge per U.S. dollar for January-November 2017 strengthened by 3 percent compared to the same period of the previous year. The weighted average yield in October on seven-day, monthly, three-month and biannual notes was 9.25 percent, 9.3 percent, 9.21 percent and 9.09 percent respectively.

The yield on annual notes in October was 8.73 percent. Kazakhstan’s debt securities are issued by the state through the Ministry of Finance in the form of treasury bonds and the National Bank in the form of short, medium and long-term notes. As of Oct. 1, the state and state guaranteed debt was 12.9 trillion tenge (US$37.8 billion), according to the Ministry of Finance.

The National Bank concluded a similar agreement Jan. 16 with Clearstream, a smaller competitor.

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