Russian Bonds Gain as Goldman Sees 600 Basis Points of Rate Cuts

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Russian bonds rose to the highest level in more than four months as Goldman Sachs Group Inc. and Morgan Stanley said the ruble’s rally has opened the way for the central bank to accelerate interest-rate cuts.

Government debt due February 2027 advanced for a fourth day, sending the yield seven basis points lower to 11.02 percent. Russian local-currency bonds have handed investors returns of 36 percent in dollar terms in 2015, the most among developing countries, after suffering the biggest losses last year. The ruble jumped 1.7 percent Monday, bringing this year’s advance to 15 percent.

With the currency no longer a “constraint” on the Bank of Russia, policy makers have “space to cut rates more aggressively,” Clemens Grafe and Andrew Matheny, economists for Russia at Goldman Sachs, said in an e-mailed note dated April 12. “These cuts should lean against the recent ruble strengthening.”

Goldman Sachs expects central bank Governor Elvira Nabiullina to cut a further 600 basis points off benchmark borrowing costs by year-end, after 3 percentage points of reductions since Jan. 1 took the key rate to 14 percent. While the stronger ruble is helping tame inflation at 15-year highs, it’s also reducing the government’s potential revenue from dollar-denominated oil exports in a year when analysts are projecting the worst fiscal deficit ratio since 2010.

The easing cycle follows six increases in 2014 aimed at stemming the ruble’s 46 percent rout as the conflict in Ukraine worsened and oil, Russia’s main export earner, slumped 48 percent in London. Brent crude, used to price the nation’s main export blend, climbed 0.3 percent to $58.06 a barrel by 6:26 p.m. in Moscow on Monday.

Rate Forecasts

Forward-rate agreements show investors betting the central bank will lower borrowing costs by 1.4 percentage points in the coming three months. The next rate-setting meeting is scheduled for April 30.

Yield hunters are “loading up on both rubles and bonds,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said in e-mailed comments. “The jump in oil prices is the second leg supporting the ruble, despite the correlation weakening lately.”

While the ruble and Brent crude moved almost in lockstep last year, oil is up only 1.7 percent in 2015. The ruble’s outperformance drove the price of Brent in ruble terms to the lowest since 2011 last week.

Weighed down by sanctions over the conflict in Ukraine and weaker oil prices, Russia’s economy is poised to contract 4.1 percent in 2015, according to a Bloomberg survey of economists. The fiscal deficit will amount to 2.3 percent of gross domestic product, a separate survey shows.

Recession Risk

Morgan Stanley expects the Bank of Russia will cut interest rates by a further 400 basis points in 2015, saying in a research note the decline will help make the recession “less severe” than earlier forecast. It lowered its projection for the contraction to 5 percent from 5.6 percent.

While the ruble is overvalued based on current oil prices, the rally may continue given the “large de-dollarization flow among corporates and households,” Grafe of Goldman Sachs said. The currency may appreciate to as much as 45 versus the dollar in the coming weeks, according to Alfa Bank, Russia’s second-largest private lender.

The dollar-denominated RTS Index of stocks increased 0.5 percent on Monday, bringing this year’s rally to 27 percent. The 14-day relative strength index on the index was above 70 for a fourth day, signaling to some analysts the security is overbought. The RTS closed at the highest level since Nov. 27. The benchmark Micex Index added 1.3 percent, led by retailer PJSC Magnit and OAO Sberbank.

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