As Russia’s invasion of Ukraine plays out, Loomis, Sayles & Company’s Global Bond, Multi-Sector Full Discretion, and Core Plus Bond teams provide insight on potential sanction implications for fixed income markets, default risks in the region, and central banks’ policy moves.

Why these active fixed income managers that follow flexible, value-driven philosophies have no direct exposure to Russian investments at this time and are currently taking a defensive investment stance is also explored.

Global Bond Team
Russia has invaded Ukraine, therefore increasing default risk of Ukrainian sovereign credit. These actions are in our view in direct conflict with international law and additional sanctions will be levied by US and its European counterparts.

Germany has already suspended the NordStream 2 pipeline approval and the US is preparing additional sanctions. President Biden has re-instituted restrictions that had been lifted a year ago when he first took office. These sanctions include restrictions on Russian sovereign debt, extending the current sanctions on new issues to include prohibitions in the secondary market for bonds issued after 3/1/22. These restrictions apply to any debt issued by the government, the Central Bank of Russia or the National Wealth Fund.

While it appears that current secondary issuance of government debt prior to 3/1/22 is not sanctioned, in our view we cannot rule out eventual sanctions on all Russian sovereign debt, as the chance of full-scale invasion has increased materially. In our view, relative value may be irrelevant in this scenario. Furthermore, there is not enough risk premium to justify holding OFZs (federal loan bonds issued by the Russian government) when there are better opportunities elsewhere without the volatility and risk.

We are seeing widening spreads across global credit markets based on the regional geopolitical situation and the signaling of reduced European Central Bank (ECB) corporate bond purchases (a position that could easily reverse upon further weakness). In this environment, we will continue to selectively add to corporate positions – and intend to maintain a defensive stance for the time being.

Finally, we have been mindful of the pressure of higher prices and the ability of corporate issuers to pass along those higher prices to consumers. Only recently, we have been seeing some weakness in consumer non-cyclical issuers’ ability to do so, but this is still in very early stages, and we are not seeing similar pressures at this time outside of this sector. Margin pressure is something we continue to monitor closely. If the Russia/Ukraine situation becomes a more serious and drawn-out crisis, there could be further increases in commodity costs (energy, grains, others) with knock-on effects to global growth and credit spreads.

Our base case is that this volatility event will resolve itself with NATO ultimately not engaging in armed conflict with Russian forces. The short term should remain volatile for markets, however, as Western government sanctions, potential restrictions on Russian securities, and other countermeasures from Russia that are still unknown could continue to disrupt global markets.

Multi-Sector Full Discretion Team
Economically, we believe this will be a tax on growth, especially for Europe, with higher energy, commodity prices and financing costs. Thus far we have not seen market adjustments to the expected central bank asset purchase reductions and rate hike agendas.

What we are watching:

  • Will we see a dovish response from the European Central Bank and the Federal Reserve? We would expect some sort of dovish pivot especially from the ECB.
  • How much room will central banks have to pivot if inflation remains stubbornly above expectations?
  • What will the Western government sanction response be?
  • Will Russia use gas supplies as a weapon? This will likely, in our view, cause a recession in Europe and potentially a global recession.
  • What type of military resistance will we see from Ukraine? Will we end up with another counterinsurgency/Iraq situation similar to post the removal of Saddam Hussein?
In our view, the worst-case scenario from here would be a full Russian invasion of Ukraine and a potential unintended confrontation with NATO forces along the Polish or Romanian border.

Given the above commentary and the mild market moves thus far, in general, we currently plan to remain on the sidelines from an investing standpoint (not selling or buying) until some of the questions above become clearer or price moves become more interesting. The above comment does not preclude select trades or normal adjustments to portfolios.

Core Plus Bond Team
Our Core Plus strategy does not have any direct exposure to Russia (sovereign, corporate or bank) at this time. We did hold approximately 20 basis points of market value in Ukrainian Government exposure but exited that position over the last several days as the prospect for diplomacy seemed to be failing. In July 2020, we participated in a new issue of US dollar-denominated sovereign bonds issued by Government of Ukraine, given attractive yield, IMF (International Monetary Fund) support, and a stable outlook at the time. The bonds were purchased at par and set to mature in 2033.

In coordination with Loomis Sayles’ sovereign analysts, the Core Plus investment team will continue to closely monitor Russia's increasingly aggressive stance and likely potential outcomes and their impacts on global fixed income markets.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity.

Commodity-related investments, including derivatives, may be affected by a number of factors including commodity prices, world events, import controls, and economic conditions and therefore may involve substantial risk of loss.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of February 2022 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. Actual results may vary.

4392666.1.1