Starting Wednesday, Estonian residents will have the opportunity to purchase two-year government bonds with an annual interest rate of 3.3 percent, with a total offering of two million bonds valued at €200 million.

Rain Leesi, head of investments at Avaron, told ERR that the terms offered generally reflect the current market situation and are reasonable for retail investors.

"The offered 3.3 percent interest rate seems good in this context, as commercial banks today are offering a 2.5 percent interest rate on two-year deposits, meaning that with the state bond, it's possible to lock in a relatively higher interest rate for two years," Leesi said.

The interest rates on term deposits at Estonia's major banks are currently quite similar. For a two-year term deposit, Swedbank, LHV and SEB all offer 2.5 percent interest, while for a one-year deposit, the rate is 3.5 percent. An exception is Luminor, which offers a two-year term deposit with a 2 percent interest rate and a one-year deposit at 3.4 percent.

Leesi pointed out that compared to a term deposit, the advantage of government bonds is the possibility of selling them later on the secondary market.

"While we don't yet know how liquid this instrument will be, we can assume that it will likely be relatively easy to sell on the secondary market. In the case of a term deposit, if a person needs to access their money before the term ends, they usually lose the interest upon early withdrawal, but with a government bond, the interest is calculated for the period the bond was held," Leesi explained. "However, the secondary market price is not guaranteed."

For individuals or companies with larger sums of money in their accounts, investing in government bonds is attractive because deposits in Estonia are guaranteed up to €100,000. For larger amounts, the deposit is exposed to the bank's credit risk, which is low but still exists. This risk can be avoided with government bonds.

"These bonds could be quite interesting for commercial banks themselves, especially from a liquidity management perspective," Leesi added.

On Tuesday, the Ministry of Finance presented an economic forecast predicting that inflation will accelerate to 5 percent next year. When asked whether the government bond's interest rate is attractive to potential investors in this context, Leesi replied that low-risk bonds should indeed be considered more as a savings product than an investment product. They ensure at least the preservation or growth of the value of real assets.

"But if we look at it from the perspective that Estonian households currently have about €16 billion in deposits, more than half of which are in demand deposits earning virtually no interest, then from that perspective, this 3.3 percent is certainly much more reasonable than keeping it in a demand deposit," said the Avaron investment head.

No sense in rushing to break fixed-term deposits

Valeria Kiisk, a member of the management board at Redgate Capital, stated that for those who currently have money in term deposits, it might not be wise to rush to break them in order to subscribe to government bonds, as previously established deposits may offer better returns.

"But if someone has a deposit that is about to mature and wants to explore their options, the next step, especially for a novice investor, should be to create a peace-of-mind fund and open a bank deposit. Then the next step should be bonds. It's a very safe instrument. From there, you can start adding risks to your portfolio, starting with stocks of large companies, and so on," she said.

Kiisk noted that from the perspective of capital markets, government bonds are an excellent opportunity, and it's unfortunate that such an option wasn't available earlier.

"In fact, our investment culture and activity have grown explosively, with so many investors in the market. However, the lack of investment opportunities has pushed some toward riskier assets, which is regrettable. Now that a more secure instrument is available, it broadens the possibilities for investors," Kiisk said.

She gave an example: if someone knows they will need a significant amount of money in two years for something like building a house, a wedding or another major life event, and they want to invest their money in the meantime, government bonds could be a very interesting option.

However, if an entrepreneur has the opportunity to launch a new business line that could grow their business significantly and quickly, these bonds might not be the best option.

Considerable interest forecast

Henrik Igasta, managing partner at Superia Corporate Finance, remarked that from a capital market perspective, government bonds are a long-awaited step that should have been taken a long time ago. He also highlighted their significance in the context of setting the price of capital.

"Since this is a first-time occurrence, and given that local investors might have learned from recent pitfalls with high-yield junk bonds, I believe this initiative will perform relatively well," Igasta predicted.

He added that if he were currently looking for a place to park his liquid assets, a bank deposit would require the money to be locked in until maturity, making government bonds an obviously reasonable alternative to consider.

Rain Leesi projected that the bond issue would likely be fully subscribed, noting that the issuance volume of €200 million is quite reasonable from the state's perspective.

"When you look at Estonia's international bond issues, they have been in the range of €1 billion to €1.5 billion, which are relatively large sums for the Estonian state. This means that if the bonds mature during a time of negative market sentiment, and it's not favorable to refinance them, the state could find itself in a difficult situation," he explained. "Smaller sums offer the state much more flexibility."

Leesi thus considers these bonds to be a good instrument for both the state and retail investors, as well as an important tool for improving financial markets and the financial behavior of Estonians.

Valeria Kiisk predicted that the buyers of these bonds would not be a homogenous group but rather a diverse mix. Institutions will certainly be involved, but since the state aims to appeal primarily to retail investors, this could also attract interest from new investors who have not previously invested.

"Estonian pension funds could also buy these bonds, as they have previously been keen to acquire Estonian government bonds," Kiisk added.

She noted that €200 million is a very large amount for a domestic program and that it's hard to say whether it will be fully subscribed.

"I don't think there will be wild oversubscription, like we saw with LHV bonds, but will it be fully subscribed? I think it will be, but just barely. I don't have a crystal ball," Kiisk concluded.

Estonian bonds' return lower than Lithuania's

SEB capital markets broker Erik Laur pointed out that on the international market, Estonia has three government bonds listed with different maturities. When comparing their yields with equivalent Lithuanian bonds, it can be concluded that Estonian government bonds offer yields that are 10-15 basis points lower than those of the largest Baltic state's bonds.

"The difference arises because Estonian government bonds have a lower risk level compared to Lithuanian ones," Laur explained.

He added that Lithuania's two-year local government bonds have been issued this year with an average yield of 3.4 percent. Assuming that this difference carries over to bonds aimed at retail investors, Estonia could potentially borrow for two years at a yield of 3.25-3.3 percent.

"Therefore, the Estonian government bonds, which begin their subscription period today, are fairly priced in the context of the markets," Laur stated.

The subscription period for the bonds begins on August 28 at 10:00 a.m. and ends on September 9 at 4:00 p.m. Subscriptions can be made through LHV, Swedbank, SEB and Luminor.

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