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Emerging-Market Noose Closes In on Ruble Bonds: Russia Credit

A selloff in emerging-market assets is showing no signs of abating as Russia failed to place all of its shortest-dated bonds at an auction yesterday.

The Finance Ministry sold 6.37 billion rubles ($193 million) of May 2016 OFZs, according to a website statement yesterday, the first time Russia hasn’t sold out a 10-billion ruble offering of the notes since their June debut. At 6.32 percent, the average yield was 175 basis points above that of similar maturity debt sold by fellow oil producer Mexico, rated the same at Moody’s Investors Service.

Bonds and currencies are tumbling from Jakarta to Johannesburg as developing-market economies founder and looming U.S. stimulus cuts drive investors from riskier assets. The ruble weakened 6.8 percent to the central bank’s basket of dollars and euros as of 6 p.m. in Moscow yesterday since May 22, when Federal Reserve Chairman Ben S. Bernanke said he could scale back debt purchases.

“The continuing correction on developing markets, both in local bonds and Eurobonds, was the main reason for the low demand,” Dmitry Dorofeev, a strategist and trader at BCS Financial Group in Moscow, said by e-mail yesterday.

September Meeting

Fed policy makers will begin to curb the $85 billion of monthly bond purchases next month, according to 65 percent of economists surveyed by Bloomberg on Aug. 9-13. The Federal Open Market Committee holds its next meeting on Sept. 17-18.

The yield on Russia’s February 2027 bond increased to a record 8.37 percent on June 24 after Bernanke said the Fed may begin curtailing debt purchases this year and end them in 2014. The OFZ fell for a third day yesterday, pushing up the yield nine basis points, or 0.09 percentage point, to 7.98 percent.

The Finance Ministry sold the three-year notes yesterday at the top end of its guidance of 6.27 percent to 6.32 percent. The securities closed at 6.34 percent on Aug. 20, according to data compiled by Bloomberg.

The auction result “could be seen as not being bad given the state of the market,” Anton Nikitin, an analyst at VTB Capital in Moscow, said by e-mail yesterday. “And there was no premium either.”

Russia is rated Baa1 at Moody’s Investors Service, the third-lowest investment-grade status. The extra yield investors demand to hold Russia’s dollar debt rather than Treasuries was unchanged at 236 by 12:50 p.m. in Moscow, according to JPMorgan Chase & Co. indexes.

The demand at yesterday’s auction probably came from several big bidders as foreign investors stayed away due to the “negative external backdrop,” Denis Poryvay, an analyst at Raiffeisen Capital in Moscow, said by phone.

“The Finance Ministry made no mistake in abstaining from offering any long bonds, realizing that there’s no demand there,” he said. “If there’s no demand for short paper, there’s even less for long bonds.”

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