The ruble advanced to the strongest level since November and five-year bonds gained as crude oil rose and tension between Russia and the U.S. over Ukraine eased.
The currency extended the largest gain in emerging markets this year as the Finance Ministry sold 78 percent of the bonds offered at an auction and Brent crude climbed for a second day. U.S. Secretary of State John Kerry and President Vladimir Putin had their first face-to-face meeting in two years on Tuesday.
Demand for Russian debt is returning as the ruble rebounds from December’s record lows and companies reduce their reliance on the central bank to meet foreign-currency debt payments. While Putin’s support for separatist rebels in eastern Ukraine has pushed relations with the U.S. to a post-Cold War low, yesterday’s meeting had a warmer tone than recent exchanges.
“It’s a good combination of rising oil prices and steady central bank liquidity flows on the back of ongoing political dialog over Ukraine,” Vladimir Osakovskiy, the chief economist for Russia at Bank of America Corp. in Moscow, said by e-mail. “This rally is at least partly fundamentally driven by oil prices, which could limit the scope for the central bank’s opposition to an overly strong ruble.”
Climbing oil prices and a cease-fire in Ukraine have made the ruble the best performer globally this year with a 24 percent advance against the dollar. The rally has returned the ruble to its level before the central bank raised interest rates 650 basis points in December to arrest the currency’s collapse.
The dollar declined against all but one of its major peers on concern disappointing economic reports will prompt the Federal Reserve to delay raising interest rates.
The ruble advanced 1.7 percent to 49.1490 against the dollar by 5:47 p.m. in Moscow, heading for the highest closing level since Nov. 27.
The currency’s rebound has slowed the pace of price growth, which soared to the fastest since 2002 in March, allowing policy makers to lower the benchmark borrowing rate by 450 basis points and fueling appetite for the nation’s bonds.
Five-year government notes rose on Wednesday, sending the yield three basis points lower to 10.90 percent after a 13 basis-point jump the previous day. Russian local-currency debt has handed investors a 45 percent return in dollar terms this year, the most among emerging markets tracked by Bloomberg.
The Finance Ministry sold 15 billion rubles ($306 million) of floating-coupon bonds due January 2020, with demand more than two times what was offered. It sold 4.6 billion rubles of fixed-coupon May 2020 bonds out of 10 billion rubles offered at a 10.92 percent weighted-average yield.
“The ruble has strengthened well yesterday and today, and on top of that, people may be buying on expectations of further rate cuts,” Olga Sterina, an analyst at UralSib Capital, said in e-mailed comments. “The yield may turn single-digit soon.”
This is the first time in 12 auctions the Finance Ministry failed to sell out the offered amount. Given the demand was 13.6 billion rubles, the Ministry may have been reluctant to offer a premium to the secondary market, Sterina said.
Government officials voiced concern in April about the ruble’s gains, while the central bank raised the cost of dollars it provides at repurchase auctions to curb bets on further currency appreciation.
“New verbal interventions and higher rates on foreign currency loans from the central bank are very possible,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by e-mail.
Preferred shares of OAO Surgutneftegas jumped 2.8 percent to 38.55 rubles as the benchmark Micex stock index retreated 1 percent to 1,687.10. The oil producer said it’s not in talks to acquire a stake in OAO Rosneft.
OAO Novolipetsk Steel, Russia’s largest steelmaker, dropped 2.5 percent to 70.90 rubles. The European Union imposed tariffs as high as 35.9 percent on electrical steel from the U.S., Russia, Japan, China and South Korea, seeking to curb competition for producers in the EU.