Widest Yield Gap Since October Signals Rate Jump: Russia Credit

Bank Rossii Chairman Serbei Ignatiev
Chairman Sergei Ignatiev said last month the fastest inflation in a year may force Bank Rossii to raise the record-low refinancing rate before the end of March. Photographer: Dmitri Astakhov/AFP/Getty Images

The widest gap since October between yields on government bonds due in 2016 and those on shorter-dated debt signals growing certainty that the central bank is ready to raise borrowing costs for the first time in two years.

The difference between yields on ruble-denominated OFZs maturing in five years and bonds due in July next year reached 167 basis points, or 1.67 percentage point, last week, the most since Oct. 12, according to data compiled by Bloomberg.

The fastest inflation in a year may force Bank Rossii to raise the record-low refinancing rate before the end of March, Chairman Sergei Ignatiev said last month. The last increase in the refinancing rate was December 2008. Traders have been pricing in the largest jump in Russian interest rates in at least 14 months, according to forward-rate agreements.

“The central bank has already said that rates might be higher and people have decided to sell long-dated bonds because they’re concerned the prices are going down,” Konstantin Kostrub, head of fixed-income trading at ING Groep NV in Moscow, said in a phone interview. “Long-dated bonds have added in more risk of interest-rate hikes.”

Longer-term borrowing costs are climbing just as the government targets raising a record 1.74 trillion rubles ($58.2 billion) from bond sales this year to help plug the budget deficit that Finance Minister Alexei Kudrin said on Dec. 29 may be equal to 3 percent of gross domestic product. The Finance Ministry canceled its last OFZ auction of 2010, balking at the “unfavorable market conditions” that drove yields on the 2016 notes to a four-month high.

First Auction

Russia’s Finance Ministry sold 29.8 billion rubles of the 30 billion rubles of 2014 OFZs offered at its first government bond auction of the year today, at an average yield of 7.03 percent, according to data on the central bank’s website. Demand was almost double the amount on offer at 58.6 billion rubles, Bank Rossii said. The ministry offered yields of 7 to 7.1 percent in guidance yesterday.

The yield on the 2016 bonds has climbed 34 basis points since they were issued in August.

“The paper being placed is almost ideal as it’s not very short and not very long,” Dmitry Dudkin, head of fixed-income research in Moscow at UralSib Financial Corp., said by e-mail yesterday. “With the threat of tightening, the curve remains very steep so there’s higher demand for shorter paper.”

The gap in yields between July 2012 OFZs and five-year notes was 151 basis points yesterday, up from 124 at the end of 2010, data compiled by Bloomberg show. Russia’s dollar bonds due in 2020 yielded 159 points more than 2015 notes on Jan. 5, within a basis point of the widest gap since the securities were issued last April.


The central bank’s key interest rates include the 7.75 percent refinancing rate and a 6.75 percent rate charged on one-and seven-day loans. Policy makers raised the deposit rate 25 basis points to 2.75 percent at their last meeting of 2010, saying in a statement that “inflation risks” needed greater attention. Three-month forward-rate agreements were yesterday pricing in 91 basis points of increases to official borrowing costs by mid-April, after 14 cuts to the refinancing rate between April 2009 and May last year.

Inflation accelerated to 8.8 percent last month, the fastest pace since December 2009, as Russia’s worst drought in at least 50 years drove up food prices and crippled the farming industry while the economy’s recovery from the record slump in 2009 stoked consumer demand. Quickening inflation is “beginning to worry” policy makers, Ignatiev said Dec. 8.

Inflation Gloom

The increase in the deposit rate, the interest on rubles kept with the central bank, has limited the appeal of OFZs for Russian banks as it reduces the carry, or yield premium, earned by investing in the federal bonds and makes borrowing between banks more expensive, Maxim Tishin, who helps manage $850 million of debt including OFZs at UFG Asset Management in Moscow, said in a phone interview last week.

“They tightened exactly where it was needed and it will put pressure on the yields of” OFZs, Tishin said. “Yields are under pressure to go higher and as inflation ticks up everything will get more gloomy.”

The ruble advanced for a third day, gaining 0.2 percent to 29.8451 per dollar by 12:55 p.m. in Moscow, headed for its strongest close since Oct. 7. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest-rate differentials and allow companies to hedge against currency movements, show the ruble at 30.0642 per dollar in three months.


The cost of protecting Russian debt against non-payment for five years using credit-default swaps dropped 1 basis point to 140 points today, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Credit-default swaps for Russia, rated Baa1 by Moody’s, its third-lowest investment-grade ranking, cost two points less than similar contracts for Turkey, which is rated four levels lower at Ba2.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 4 basis points to 187, according to JPMorgan Chase & Co. EMBI+ indexes. The difference compares with 125 for debt of similarly rated Mexico and 164 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

The yield spread on Russian bonds is 44 basis points below the average for emerging markets, according to JPMorgan indexes, the narrowest in a week.

Fed Funds

The prospect of rising interest rates is also spurring Russian companies to issue shorter-term debt, with 78 percent of the 55 issues of ruble or dollar-denominated bonds announced since the end of October to mature in five years or less, Bloomberg data show. OAO Gazprombank, the lending arm of Russia’s gas export monopoly, sold 10 billion rubles of three-year bonds on Dec. 8.

Investors are more inclined to buy short-term debt when they expect rates are going to rise because it leaves them less exposed any drop in price, Sergey Dergachev, who helps manage the equivalent of $8.5 billion in emerging-market debt at Union Investment in Frankfurt, said by phone.

After cutting its target Fed Funds rate to near zero in the wake of the global financial crisis, the U.S. Federal Reserve may soon be prompted to consider raising costs, Dergachev said. Inflation quickened 0.5 percent in December from the previous month, more than the 0.4 percent median forecast of economists surveyed by Bloomberg. Futures put the chance of a 25 basis-point increase to the 0.25 percent Fed Funds rate at 30 percent by the end of the year.

“Globally right now people are getting into shorter duration, they’re getting ready for a curve shift upwards,” Tim McCarthy, who helps manage $1 billion in emerging-market assets, including the Russian government’s dollar bonds due 2015, at Valartis Asset Management, said by phone from Geneva, Switzerland. Quickening inflation is “pushing people in to the shorter end,” he said.

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