Determinants of the Yield on Russian Sovereign Bonds with Floating Coupons

In recent years, amid the tightening of the monetary policy, floating-rate sovereign bonds (OFZ-PK) have come to play a significant role in the Russian bond market. In conditions of high interest rate volatility, they appear to be an attractive instrument for investors because they reduce the interest rate risk. This makes the analysis of OFZ-PK pricing particularly relevant. This paper uses theoretical models and actual OFZ market data to demonstrate the factors influencing the yield of OFZ-PK bonds. First, it systematizes the main types of OFZ-PK bonds available on the market and discusses the specifics of floating coupon calculation. Then, a theoretical model for evaluating OFZ-PK bonds is presented. It is shown that due to the arithmetic averaging of the floating rate inherent in most OFZ-PK, investors in such securities lose interest capitalization and become exposed to additional interest rate volatility risk. Empirical analysis of the OFZ market data revealed that OFZ-PK bonds trade at a premium to OFZ bonds with a fixed income (OFZ-PD). Most of the premium is explained by the absence of interest capitalization and interest rate volatility. It is shown that the new OFZ-PK bonds with coupons based on the RUONIA forward rate are more suitable for modeling and, in theory, should be comparable in terms of yield to OFZ-PD bonds. However, due to the limited availability of interest rate derivatives in the current Russian market, convergence between OFZ-PK and OFZ-PD yields is not always achievable. The findings of this study may be useful to investors in OFZ-PK bonds and may also be taken into account by issuers when designing the terms for placing floating-rate bonds.