Constructing the Yield Curve for New Yuan-Denominated OFZs

The paper examines the problem of estimating a zero-coupon yield curve (ZCYC) for Russian bonds denominated in Chinese yuan. The relevance of the topic is driven by the growing popularity of yuan-denominated bonds in the Russian market since 2022, as well as by the issuance of the first yuan-denominated federal government bonds (OFZs). Given that the number of available government bonds in yuan is limited (only two issues are currently outstanding), the study proposes a new approach to ZCYC estimation that jointly incorporates data from both newly issued yuan-denominated OFZs and yuan-denominated corporate bonds. This is achieved by extending the traditional Nelson-Siegel yield curve model with an additional parameter capturing the credit risk inherent in corporate bonds. As a result, the model produces two yield curves: a local risk-free yuan ZCYC and a corporate yuan ZCYC. The model is additionally tested using data on dollar-denominated replacement bonds. It demonstrates performance comparable in quality to the conventional yield curve estimation approach based on a standard Nelson-Siegel model. The findings of the study are of practical relevance for investors in yuan-denominated bonds as well as for their issuers.