Russian Bonds Drop as Central Bank Moves to Curtail Ruble Rally

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Russian bonds fell for the third day as the central bank curtailed the supply of dollars to deter speculation in the nation’s debt.

Yields on five-year bonds climbed three basis points to 11.52 percent, trimming the drop in April to 94 basis points. The Bank of Russia said on Tuesday it was offering $300 million at an auction of seven-day repurchase agreements, the least since it started the facility in October.

Policy makers have taken steps to reduce banks’ access to cheaper foreign currency this month after lenders drew on the facility to invest in Russian bonds and take advantage of the world’s best carry trade. The Bank of Russia raised the rate on dollar repos three times in the past month as the ruble extended a rally that’s driven it 17 percent higher since Jan. 1.

“It’s a clear statement of intent from the central bank,” Yury Tulinov, the head of research at PAO Rosbank in Moscow, said in e-mailed comments. “First they raise the rates, then they tighten the limits to squeeze out speculative play.”

The ruble swung between gains and losses, weakening as much as 1.2 percent, before trading 0.5 percent stronger at 51.72 per dollar by 5:15 p.m. in Moscow. Russia will offer 20 billion rubles ($387 million) of floating-coupon bonds due in December 2017 on Wednesday, the Finance Ministry said on its website.

Budget Strain

The stronger currency can hurt the competitiveness of Russian exporters and potentially cut into budget proceeds since the country relies on the oil and gas industries for about 50 percent of revenue. Brent crude decreased 0.4 percent to $64.58 a barrel on Tuesday, trimming its advance in 2015 to 13 percent. The fiscal shortfall is set to widen to 2.6 percent of gross domestic product this year, according to the median estimate in a Bloomberg survey.

“A strong ruble rate without a commensurate rise in oil prices is not favorable for Russian authorities,” Tulinov said. “The central bank’s actions are a sort of game against the ruble.”

Russian policy makers introduced the repo facility in October to help companies pay off foreign debts as sanctions over the conflict in Ukraine shuttered overseas capital markets. As companies overcame the biggest monthly repayment hurdles for the year, lenders channeled some of the money into higher-yielding ruble assets, fueling a sovereign bond rally that handed investors 36 percent returns since Jan. 1.

Bank of Russia placed $88.8 million during the one-week repo auction Tuesday, the lowest amount since Dec. 2, central bank data show.

Yandex Drops

The Micex Index of stocks was little changed, while the RTS Index declined 1 percent to 1,012.78. United Co. Rusal’s Moscow shares climbed 4.9 percent, while Yandex NV tumbled 7.4 percent.

Yandex, Russia’s largest search engine, retreated after forecasting slowing sales growth. Earnings fell in the first three months of the year as a weaker ruble inflated rental and personnel costs.

“If you think of Yandex as a growth story and a macro-resilient story, it’s fairly disappointing,” Luis Saenz, head of equity sales and trading in London for Moscow-based BCS Financial Group, said by e-mail. “Short-term growth is slowing, no visibility later in the year, revenues are clearly not as resilient as we thought, and there are few obvious candidates to drive faster growth beyond general macro recovery.”

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