Russian Fixed-Rate Bond Demand Soars at 1st Auction of Quarter

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Demand for Russian fixed-rate bonds jumped to the highest level since 2013 as speculation the central bank will keep lowering interest rates drove appetite for longer-dated debt.

The Finance Ministry received 28 billion rubles ($483 million) of bids at an auction of notes maturing in January 2028, 5.6 times the amount tendered and the most for that maturity since November 2013, according to ministry data. Russian bonds rallied this year, sending five-year yields down 3.22 percentage points after the Bank of Russia lowered benchmark borrowing costs by 300 basis points to 14 percent.

As demand picks up for fixed-rate debt, the ministry sold less than a third of the 15 billion rubles of floating-rate notes offered on Wednesday. The central bank will probably reduce its key rate to 10.8 percent by year-end, according to the median forecast in a Bloomberg survey, as inflation slows and policy makers seek to shore up the economy.

“It looks like people are preparing for significant rate cuts by the end of the year and are trying to buy the longest OFZs in order to play on them,” Dmitry Postolenko, a money manager at Kapital Asset Management LLC, said by e-mail on Wednesday. “Investors are betting inflation will slow, which will allow the central bank to cut the key rate.”

The successful fixed-rate sale comes after the ministry received bids valued at 5.5 times the 10 billion rubles of 2023 securities it offered a week ago -- the biggest sale of fixed-rate debt since October last year.

Floating Rates

The government reintroduced floating-rate debt in the first part of the year to tempt investors with a security that offers some protection against high interest rates and accelerating inflation. The coupon on the floaters is linked to the average of the Ruonia lending rate in the previous six months. Inflation accelerated to 16.7 percent, the fastest pace in 13 years, in January.

The ruble erased earlier declines, strengthening 0.9 percent against the dollar to 57.7090 and extending a 5.8 percent gain in March. Crude oil, Russia’s main export earner, rebounded 2.4 percent to $56.43 per barrel in London trading.

Russia’s dollar-denominated RTS Index of equities rose 2.4 percent to 901.83. The ruble-denominated Micex Index gained 1.6 percent after rallying 16 percent during the first quarter, the biggest advance for the period since 2010.

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