Russian Linkers Tempt Raiffeisen as Rates Caution Ends OFZ Rally

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The day after Russia’s central bank damped the world’s best 2015 bond rally with warnings of inflation, the Finance Ministry announced its first offering of securities protecting against rising prices to lure foreign investors.

The government plans to raise at least 150 billion rubles ($2.8 billion) by selling inflation-linked bonds to a syndicate of banks, along with a domestic auction, Konstantin Vyshkovsky, head of the ministry’s debt department, said in Moscow Tuesday.

Russia will use the so-called linkers to plug its biggest budget deficit in five years as sanctions and lower oil prices contribute to the economy’s contraction. OFZ bonds fell this week as central bank Governor Elvira Nabiullina said future interest-rate cuts would be smaller and fewer because of inflation risks.

“I’m not buying fixed-rate OFZs anymore because I don’t see much room for growth as future rate cuts are limited,” Konstantin Artemov, who helps oversee the equivalent of about $300 million as a money manager at Raiffeisen Capital in Moscow, said in e-mailed comments Tuesday. “I would be interested in linkers, which offer an opportunity to get a return higher than inflation.”

Policy makers signaled further easing would be limited, after cutting rates on Monday by 100 basis points, the smallest amount since March. While inflation has slowed from 16.9 percent that month -- the fastest pace in 13 years -- a possible deterioration in external economic conditions and looser fiscal policy are among the factors the central bank warned could reignite price growth.

‘Long Overdue’

The bond value will be linked to inflation with a lag of three months, according to a presentation released by the Finance Ministry on Monday.

Sales of “inflation-linked OFZs are long overdue,” Alexey Potapov, an analyst at UFG Wealth Management in Moscow, said by e-mail. “This will be very useful for the pension funds, which need long-term instruments with a hedge against inflation and for banks as an instrument for diversifying their traditional OFZ portfolio.”

Annual inflation was 15.6 percent as of June 8, almost four times the central bank’s medium-term target and about 5 percentage points higher than the yield on Russia’s February 2027 ruble bonds.

Paul McNamara, a fund manager at GAM UK Ltd. in London, said he’s concerned most investors will hold the notes to maturity and it will be hard to buy and sell the new securities. Linkers in South Korea, Poland and South Africa “almost never trade,” he said by e-mail.

Best Returns

Rate cuts totaling 550 basis points this year have helped drive an OFZ rebound, with the bonds returning 34 percent in dollar terms this year, the best performance in emerging markets.

Nabiullina’s less dovish tone on rates spurred gains in the ruble while damping the bond rally.

Russia’s currency fell for the first time in three days on Wednesday, weakening 0.8 percent to 54.212 per dollar as of 5:34 p.m. in Moscow. The 2027 bonds fell, lifting the yield to 10.94 percent.

Russian officials met with investors in the U.S. and the U.K., and the ministry hopes to have the notes included in Barclays Plc’s index of inflation-linked debt, according to Vyshkovsky at the Finance Ministry.

“This is a serious step toward catering to the market’s demand,” Andres Vallejo, who helps oversee the equivalent of $3.2 billion as a money manager at Kapital Asset Management in Moscow, said by phone Tuesday. Providing an inflation-linked bond helps safeguard pension funds against price growth, he said.

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