Ruble Drop Not Deterring Russia Bond Bulls as Auction Sells Out

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Russia sold the biggest tranche of its longest-maturity fixed-rate debt in seven months, tapping demand from investors seeking to lock in higher interest rates.

Investors bid for more than three times the 10 billion rubles ($200 million) of OFZ bonds offered at the auction, enabling the Finance Ministry to sell the January 2028 notes at a weighted average yield of 10.56 percent, 14 basis points below Tuesday’s close. Demand for the nation’s fixed-rate debt is growing as the Bank of Russia unwinds 2014 rate increases that totaled 11.5 percentage points.

The auctions on Wednesday -- which also included a sale of 10 billion rubles of floating-rate notes due in December 2017 -- came as the ruble fell for a second day, driven lower by central bank and Finance Ministry purchases of foreign currencies. Projections for policy makers to lower benchmark borrowing costs to less than 10 percent by year-end have enabled Russia to boost fundraising as it finances a fiscal deficit.

“With the easing outlook there is still room for yields to go even lower,” Vladimir Osakovskiy, the Moscow-based chief economist for Russia at Bank of America Corp., said in e-mailed comments on Wednesday. “We still keep the long OFZ recommendation, even though currency risks are on the rise.”

The Finance Ministry has raised 174 billion rubles in the second quarter out of the 250 billion rubles planned. The ruble lost 0.9 percent to 49.9940 per dollar by 5:29 p.m. in Moscow. The Micex Index of equities decreased for the third day to the lowest level since April 23, declining 1.3 percent.

Further Easing

The Finance Ministry and central bank have signaled they regard the ruble’s 21 percent appreciation this year -- the biggest worldwide -- as overdone. While the stronger currency damps inflationary pressures it also threatens to curb Russia’s export earnings in local-currency terms. The nation’s budget deficit is set to widen to 3 percent of gross domestic product this year, the biggest since 2010, forecasts compiled by Bloomberg show.

“The ruble may strengthen excessively on portfolio inflows if the authorities provide no signal to the market that they are ready to act,” Tatiana Orlova, a senior economist for Russia and the Commonwealth of Independent States at the Royal Bank of Scotland in London, said by e-mail.

Inflation in the week through May 18 rose by 0.1 percent compared with the previous week. The data may signal that annual inflation slowed to 16 percent from a 13-year peak of 16.9 percent in March, Osakovskiy said.

“This is in line with our expectations and supports our call of further monetary easing,” Osakovskiy said. “We expect another 100 basis-point cut” at the next meeting on June 15, he said.

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