J.P. Morgan to Drop Russian Government Bonds From Some Indexes -- Update

By Christopher Whittall And Carolyn Cui 

Russian government bonds will be dropped from two J.P. Morgan Chase & Co. emerging-markets indexes, after the country was downgraded to junk status by ratings firms Moody's Investors Service and Standard & Poor's earlier this year.

In a note published on Friday, the bank said that under its rules, Russia is no longer eligible for inclusion in the widely followed investment-grade segment of its EMBI and GBI-EM suite of indexes.

Russian securities will be removed from the EMBIG investment-grade indexes on March 31 and the GBI-EM investment-grade indexes on April 30.

Russia will remain in other J.P. Morgan indexes that don't require a minimum credit rating.

Following the index change, securities such as exchange-traded funds could be forced to eliminate exposure to Russian debt, which could prompt a bout of selling. But many money managers have reduced their exposure to Russian bonds as the country's economy continues to deteriorate due to declining energy prices and falling domestic demand.

Prices on Russian sovereign bonds already reflect its junk rating, suggesting that many investors have already sold out of the bonds. The yield on Russian 10-year bonds maturing in September 2023 fell to 6.087% on Friday from Thursday's 6.302%, according to data provider Tradeweb. When bond yields fall, prices rise.

But Russian bond yields have risen high enough to lure to some investors, especially when compared with the relatively low or negative yields on government debt considered safe elsewhere. The yield on the 10-year U.S. Treasury bond was 1.932% on Friday.

Though "Russia is a very risky place to invest right now, we actually like it," said Jorge Mariscal, emerging-markets chief investment officer at UBS Wealth Management, which oversees $1 trillion in invested assets. The firm holds more Russian dollar-denominated government debt than is recommended by its benchmark. "Most of the bad news has already been priced in," Mr. Mariscal added.

Write to Christopher Whittall at [e-mail] and Carolyn Cui at [e-mail]

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