OFZ for individuals in 2021: profitability + expert opinions

Bonds for individuals are not only OFZ-N - they are valuable debt securities with minimal risk of default. They are highly reliable and secured, setting the “pace” for quotations of municipal and corporate bonds placed on the Moscow Stock Exchange.

Individuals, professional investors, including foreign traders can purchase OFZs. Let's take a closer look at how profitable it is to lend money to the government, and what types of OFZs are offered to the population in 2021.

What are they and why are they needed?

Using federal loan bonds, the state raises funds from individuals and legal entities. The issuer of such bonds on behalf of the state is the Ministry of Finance of the Russian Federation. Private investors can buy and sell federal bonds on the secondary market. Large players, in addition, can also participate in primary placement auctions, purchasing large lots of bonds.

There are no more reliable instruments on the Russian market for individuals than federal government bonds. In 2021, against the backdrop of non-residents withdrawing from OFZs, special types of federal loan bonds, aimed specifically at individuals, began to receive active distribution. But more on that a little later.

State goals

The primary task of issuing federal loan bonds is to maintain balance and cover the budget deficit. In addition, the goal may be to pay off debt to other states. Infrastructure development is also included in the list of targets for the issue of federal loan securities. In recent years, for example, a large amount of funds raised from individuals has gone to large-scale infrastructure projects.

Validity

Federal loan bonds are issued with different maturities. In 2021, the prevailing number of issued instruments aimed at individuals have a maturity of 3 years. On the Moscow Exchange you can find issues with both shorter and longer circulation periods. Federal loan bonds are often divided into short-, medium- and long-term.

Why are they released?

When an issuer (company, government, or municipality) issues bonds, they are borrowing money. With the obligation to pay interest on coupons and principal at the end of the circulation period.

The main difficulty or problem. On the last day of circulation of securities, a “huge pile” of money is needed in order to pay off all bondholders.

Where can I get it?

Save in advance. Freezing money. Save and save. And save again. What if there is no money? Borrow on the side again?

Or you can issue depreciation bonds. Paying off the debt in small installments over the entire term.

The gradual early repayment rule is beneficial to companies with constant cash flow.

Examples.

Let's take some magnet. To expand a business (open new stores) you need money. 900 million. Funds were raised by issuing bonds. The company needs about a year from raising money to launching retail outlets. Then they start generating profits. And Magnit has the opportunity to use part of this profit to reduce debt.

Lukoil. Investor money is attracted to develop and launch a new field. The start of the project is planned in 5 years. After this, new oil (and new money) will flow like a river. This money can be used to amortize the debt. This means we issue similar bonds.

Advantages for the issuer:

• Reducing the distortion of the size of payments. The company, in small parts, gradually pays off the main debt painlessly for the business.
• Savings on coupon payments. By amortizing bonds, total debt is reduced. Interest is paid on the smaller amount.

Amortizing bonds are similar to a consumer loan or mortgage. The borrower, receiving a loan from a bank, pays monthly interest on the loan + part of the debt. This is a more lenient payment regime if only interest had to be paid. And in 5-10 years, pay off the entire debt at once.

Types with transcripts

There are several types of federal loan bonds:

1. Bonds with debt amortization (AD). Their distinctive feature is the gradual repayment of the nominal part of the bond. However, these bonds are gradually going out of circulation, and their popularity among investors is fading.
2. Federal loan securities with constant income (PD). This is the most common type of public debt financial instrument.
3. Bonds with variable coupon payments (PC).
4. Government bonds of a federal loan with nominal indexation (IN).
5. People's bonds (OFZ-N). The issue of these government bonds is aimed at individuals.

Now about some of them in more detail.

By coupon payment type

As I said, federal bonds can have a fixed or time-varying coupon. Government bonds with a constant coupon have a predetermined rate that remains unchanged throughout the entire circulation period of the instrument. Such bonds are extremely relevant now, since the Central Bank of the Russian Federation has repeatedly spoken about the imminent resumption of the process of reducing market rates.

Federal loan securities with variable coupons change their yield several times during their circulation period. Its indicators are tied to the RUONIA index (Ruble Overnight Index Average), and it, in turn, strongly correlates with the key rate of the Central Bank of the Russian Federation. This type of bond is well suited for individuals, since there is no need to delve into economic processes and predict the dynamics of rates.

There is also such a type of federal loan securities as zero-coupon bonds. But private investors and individuals practically do not own such instruments, and few new bonds of this type are being issued today.

At par

The face value of a federal loan bond may be amortized or indexed. In the first case, part of the nominal value is returned to the investor along with regular payments. In the indexation option, the nominal component of the bond is tied to inflation indicators. If the Ministry of Finance in 2021 issued OFZ-IN with a denomination of 1,000 rubles, and inflation for the reporting year (2018) was recorded at around 5%, then in 2021 its denomination will already be 1,050 rubles.

Euro Government Bonds

Government bonds are issued in foreign currency to enter the international stock exchange. They differ significantly from the usual OFZs, designed for professional and non-professional investors at the same time.

Their main features:

• Currency – US dollar.
• Nominal value – 100,000, 200,000 USD.
• Profitability – coupon payments and the difference in purchase and sale prices.

Foreign currency bonds are expensive and are not available with small initial investments. However, the profit is significantly higher than the rates on foreign currency deposits.

If we analyze the yield of OFZ eurobonds in Russian monetary equivalent, dollar 4.5% is more profitable than ruble 7-9%.

Advantages and disadvantages

Specific types of federal loan instruments have their pros and cons. I'll tell you about the general positive aspects. If you compare the rates of OFZ and deposits, it becomes clear that the profitability of the former is higher. In addition, the level of reliability of bonds is higher.

Bonds can be bought and sold on the secondary market without loss of return for the period. I’ll make a reservation that this point does not apply to people’s OFZs, which were actively offered for purchase to individuals through state banks.

State bonds have few downsides, although I note that they are far below corporate bonds in terms of profitability.

Where to look for information

On the website about bonds - rusbonds.ru. We go through free registration (without it, it does not allow us to search and select papers).

Go to “Search”. We set filtering for selection by parameters:

• Issue status: “In circulation”
• Depreciation - “Yes”

If desired, in the “Market sector” field, you can select by type of bonds: OFZ, corporate or municipal.

How to make money from them

For individuals who are ready to buy OFZs, the main option for making a profit is regular coupon payments. A coupon reinvestment strategy may be a good solution here.

Other types of federal bonds are traded on an exchange, which means there is a way to benefit from the market price of the bond. Let me give you a real example. Government paper series 26207 in September 2021 cost 95% of the face value, and at the end of 2021 and the beginning of 2021 it was already trading at about 100% of the face value. Investors who bought this security during that period, in addition to the coupon, could earn on the increase in value.

How is the OFZ rate calculated?

The rate on federal loan bonds closely correlates with the key rate of the Central Bank. For example, in the period from September 17, 2018 to December 16, 2018, the key rate was 7.50%, and from December 17, 2018 it increased to 7.75%. Representatives of the Central Bank say that in the future rates may turn around and go down. Given this information, it is possible to predict future yields on federal loan bonds.

For FD type debt receipts (fixed income), the coupon value is set only once for the entire circulation period. For government bonds with floating rates, the coupon is constantly changing.

As an example, I’ll take the OFZ bond 29006. It assumes a floating coupon and redemption in 2025. The regularity of payments is every 182 days, the previous coupon was accrued on 02/06/2019 at a rate of 8.25% per annum.

The next payment is scheduled for 08/07/2019, but the coupon rate, due to the increase in the RUONIA index, will now be 8.48% per annum. To calculate the rate and yield on instruments, individuals can use special bond yield calculators located on the cbonds and rusbonds websites.

What is the profitability

The coupon yield on federal loan bonds will be a couple of percent higher than the rate on deposits for individuals. For example: a deposit in Sberbank in 2021 guaranteed an interest rate of 5–5.5% per annum. And the rate on OFZs aimed at individuals, which was offered by the same Sberbank also with the acquisition in 2018, is 7.25%. In addition, it involves more regular payments, the reinvestment of which will help individuals increase the percentage of earnings from investments in federal receipts.

Risks

Among Russian assets, federal loan bonds have the highest reliability rating. Payments under them are guaranteed not by private individuals, but by the state. Many investors classify such government securities as risk-free assets.

Are they taxable?

All types of federal loan bonds are exempt from tax on coupon income. However, 13% PFDL will still have to be paid if there is a profit from an increase in the value of the body of the promissory note. But this applies only to sales on the secondary market and does not affect popular OFZs aimed at individuals.

Is it profitable to buy

The benefits of purchasing OFZs compared to a deposit are obvious. Many individuals, other things being equal, have already begun to prefer bonds to standard deposits, and this is a good sign for the general financial mentality. Higher profitability, liquidity and regularity of payments, combined with the highest level of reliability, give these instruments an unconditional advantage.

Is it possible to buy on IIS?

An individual investment account is another tool that individuals have begun to actively adopt at the present time. You can use this account to purchase any type of federal loan bond. With only one limitation: the maximum amount you can top up your account per year is 1 million rubles.

Where can I see the list of products available for purchase?

Those OFZs that are traded on the Moscow Exchange can be tracked through special sites on investment topics: rusbonds, cbonds, etc. Information is available online through interactive broker terminals. If you need information on OFZ-N for individuals, which are sold only in the banking system, then you should look for it in the current offers of banks.

How much does 1 piece cost?

In most cases, the face value of one federal loan bond is set at 1 thousand rubles. However, the purchase of national bonds for individuals now has a minimum financial threshold of 30 thousand rubles.

Federal loan bonds as an example

The nominal value of one bond is 1000 rubles. This is true for almost all bonds.

ATTENTION! The price on the secondary market most often differs from the nominal price; in addition, it includes the accumulated coupon income (ACI). The market price is expressed as a percentage of the nominal value, the income tax is indicated in rubles. Upon purchase, all this is paid to the OFZ seller.

For example: OFZ 24019 , its quotation is 101.706 , NKD = 40.27 rubles. What will be the cost of paper in rubles? Denomination – 1000 rubles. , and the quote is expressed as a percentage of the face value.

1000 rub. * 101.706% = 1017.06 rub.

Taking into account the NKD that will be paid to the seller, the final cost of the security for the buyer will be:

1017.06 + 40.27 = 1057.35 rubles.

The cost can be either less or more than the nominal value, it all depends on the bond’s quote on the market. It is worth remembering that at the time the OFZ is redeemed, its owner will receive the nominal value, regardless of the purchase price.

The placement period for these securities depends on their type and ranges from 1 year to 30 years.

The annual percentage return ranges from 7.5% to 10.5%. In some cases, it may depend on the period of ownership of the bonds.

Another example about bond yields, in simple words, can be seen in this video:

Where are traded and who can buy OFZ

All federal loan bonds are placed on the Moscow Exchange. The only exception is folk debt instruments aimed at individuals. Tradable bonds can be purchased by all market participants, including foreign counterparties.

Is it possible to buy OFZ without intermediaries?

There is such a possibility. If an individual wants to invest his savings in OFZ without an intermediary in the form of a bank, then he should register on the stock exchange and obtain the status of a private investor. This can be done by opening a trading account in one of the Russian licensed brokerage houses. The procedure itself is free, but you will have to pay minor fees for further transactions.

Best brokers

The broker should be chosen from among the largest representatives of the industry. The investor will receive a reliable income, combined with a high level of service and competitive commissions.

Reliable Russian brokers

How much do they cost today: online course (graphs will be here)

Yield on OFZ of previous years

Purchase without intermediaries

Issues of OFZ-n are carried out by the Ministry of Finance for individuals who are not familiar with exchange trading. Purchasing securities directly from an agent bank requires a smaller volume of transactions; you just need to open an account and conclude an agreement. On the other hand, purchasing OFZ-n from a bank reduces the profitability due to the commission to 1.5%.

To obtain the maximum benefit from a bond, you can use brokerage services; such companies operate both as separate structures and as subsidiaries of the same agent banks.

Opening a brokerage account is no more complicated than opening a bank account, and there are no large commissions for the purchase of securities. The inconvenience is the need to install a trading terminal on your computer and independently purchase bonds through it. The positive aspects include savings on the service, and the ability to purchase any number of bonds and resell them without financial losses.

Is it worth investing: expert opinion

Federal loan bonds are an instrument that should be used by both ordinary individuals and experienced investors. The former can receive acceptable returns with an unconditional level of reliability, while the latter can benefit additionally from high liquidity and the ability to use these securities as collateral for trading positions.

Advantages over other securities

I repeat that federal debt securities are the most reliable instrument on the market. They are super-liquid for our exchange, and they provide tax benefits, unlike, for example, dividend stocks or high-yield bonds. In addition, government federal loan bonds have a low financial entry threshold, because 1 bond can be purchased for about 1,000 rubles.

Who is eligible to purchase?

OFZ-n can be purchased by adult citizens of the Russian Federation who are individuals. The purchased securities cannot be transferred for registration to other banks and depositories, sold or transferred in any other way, or used as collateral. People's loan bonds can only be returned to the same bank where they were purchased.

After the expiration of the 3-year period, the cost with additional interest will be credited to the client’s personal account, after the application, or automatically. You can sell bonds before they expire, losing part of your investment income.

Calculation of purchases using an example

For example, I’ll take OFZ 26224, issued in February 2021. Its nominal value is 1000 rubles, the annual coupon rate is 6.90%. This is a government paper with a constant income, so the coupon will be relevant not only for 2021, but also for all subsequent periods. Coupon payment 2 times a year. The instrument is scheduled to mature in 2029; its market value is now 92.5% of its face value.

Those. any individual who opens an account with a broker will be able to buy this promissory note for 925 rubles. By opening the online calculation calculator, the investor will see that he will receive a current yield to maturity of around 8.16% per annum.

Now an example for individuals. Sberbank is now offering OFZ-N of the third issue No. 53003. These federal loan notes have been issued since September 17, 2021. The coupon is paid every 182 days. The purchase price is set at 100% of the face value, or 1000 rubles. The coupon rate is 7.25% per annum.

Are they taxable?

The only fees that a people's bond is subject to are bank charges. Agent banks, which are VTB and Sberbank, charge a commission when closing a bond. For an amount up to 50 thousand rubles it will be 1.5% of the transaction, from 50 to 300 thousand - 1%, and from 300 thousand - 0.5% of the total amount. The state does not impose taxation on this type of securities.

Read in a separate article all the features of taxation of OFZ, corporate and foreign currency bonds.

Investor reviews

Many experienced investors use this tool and have mostly positive reviews of it. Market participants note the high liquidity of federal loan receipts. Instead of storing money in cash, most traders park their capital in short government bonds. Also, according to active investors, recent years have been good in terms of earning opportunities provided by the government securities market.

How to get a personal income tax deduction?

This is surprising, but there is also a way to not pay taxes at all. But, as is usually the case, with nuances. You can receive a personal income tax deduction when purchasing a bond only by opening an individual investment account (IIA). This service appeared in 2015 and can be used by any citizen of the Russian Federation. You can apply for an IIS only once per person and the account has a number of restrictions.

By opening it, you can get a full tax deduction and even additional money from the state. Due to these payments, which are essentially a refund of your past taxes paid, in combination with the purchase of OFZ, you can get a yield of 20% per annum. Thus, the state wants to interest the population in trading on the stock exchange and increase the financial literacy of the country. But this is a topic for a separate article.

Which is better: this type or regular OFZs

If we compare ordinary government securities quoted on the stock exchange with those offered by banks to individuals, the former have a number of advantages. For starters, there's liquidity. An individual cannot sell a bond to a bank at any time while retaining the accumulated income. And an investor can do this by selling his bonds on the secondary market.

In addition, the selection of exchange-traded federal loan bonds is much larger than the list that banking structures offer to individuals. In addition, individuals cannot buy federal bonds for an amount less than 30 thousand rubles. However, quoted instruments also have one drawback: these are brokerage and exchange commissions. They must be paid every time you make transactions on the exchange.

In the case of purchasing federal loan bonds through a bank, an individual may be provided with preferential terms on commissions if he holds them for a certain period. But the benefits of exchange-traded instruments are much greater, so it is currently better for individuals to buy ordinary securities through a brokerage account.

Why are OFZ-AD issued?

In general, OFZ-AD are more beneficial to the issuer than to the investor.

Depreciation is the obligation of the issuer to pay part of the face value within a specified period, that is, to partially repay the debt.

If the state issues OFZ-PD and wants to repay the debt in advance, then it will be able to buy back part of the bonds that are currently being sold and pay coupons to itself, thereby reducing the debt. But in any case, most of it will remain with investors, and only those who want it will sell the paper. In the case of OFZ-AD, all investors are forced to sell part of the bonds. This is also the reason for the low interest of investors in the paper, since the bond is beneficial only for one party.

List

In addition to the QUIK terminal, the list of OFZ-PD can also be viewed on special websites. For example, from the broker FINAM or on the website rusbonds.ru.

Search on rusbonds. You can simply type “PD” in the name or find it using filters. Please note that the "Issue Status" filter must be set to "Circulating"

Below is a compiled list of all OFZ-PD in circulation. With a convenient annual coupon income column. To see the market price, go to QUIK or find this security on the rusbonds website (you will have to register), there in general information there will be the market price of the security for the previous trading session.

Is it worth buying the Moscow Exchange index on IIS?

The Moscow Exchange Index (MICEX) is a derivative instrument based on the exchange rate of 111 assets:

• 72 bond indices;
• 36 stock indices;
• 3 pension fund indices.

Any individual can either buy OFZ or the Moscow Exchange index on the IIS. As of December 2021, the rate is 109 rubles. Moreover, in January of the same year it was about 80 rubles. Those. the annual yield was 29%. Of course, there are worse times - for example, in 2021 the rate fell by 26% per annum.

Therefore, the question arises whether it is worth investing in this index or not. To answer this, we need to understand where exactly we are investing. The index consists of blue chip stocks - the most capitalized companies. It reflects the economic “well-being” of the Russian stock market, and one cannot speak confidently about its stable growth. Although in the long term (over 5 years) the index has actually grown. Therefore, it can be included in your portfolio, but for significant investments (30-40% of the contribution or more) it is hardly suitable.

Thus, you already know which bonds to buy on IIS. It is best to invest up to half of your funds in OFZs, since this is such a reliable strategy that you cannot imagine a more reliable one. And to increase your potential income, consider the securities of large companies - Sberbank, Rosneft, Gazprom, Norilsk Nickel, Google and many others. Sharing risks is a guarantee of your success.

How to purchase OFZ

1. First, you need to open a brokerage account with any of the brokers; there are a huge number of them on the market, for example, VTB, SBER, Tinkoff, BCS, FreedomFinance.
2. When the brokerage account is ready, we decide on the investment period in order to avoid the mistakes described above.
3. If we want to receive monthly deposits into our account, we select several papers so that the payment terms are for each month. If coupons are not important, then we choose the one with the maximum return for our investment period. We buy.