Russia’s Missed Debt-Sale Goal Shows Rate-Cut Bets Went Too Far

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Russia raised less money than targeted at a debt auction as demand for one series of bonds offered fell to the lowest level since April, the latest sign investors are scaling back bets for interest-rate cuts..

The nation sold 9.82 billion rubles ($172 million) of local debt, known as OFZs, after tendering 15 billion rubles of notes maturing in five and 13 years. While bids exceeded the amount offered, investors’ yield demands were higher than the government was willing to pay following a four-week rally in sovereign bonds.

Those gains came to an end this week as investors speculated the impact of potential interest-rate cuts is already factored into prices. The Bank of Russia will make its next decision on borrowing costs on July 31 and Kapital Asset Management expects policy makers will hold off on changing them amid concern inflation isn’t falling fast enough to justify lower interest rates.

“Investors are favoring” bonds linked to inflation, Andres Vallejo, who helps oversee 175 billion rubles as a money manager at Kapital Asset Management in Moscow, said by phone. “I don’t expect the central bank to cut the rate next week. It’ll most likely take a pause because of inflation concerns.”

Russia sold 75 billion rubles of so-called linkers at a debut offering last week. Of investors who bought them, 71.4 percent were Russian, while U.S. investors accounted for 11.1 percent and U.K.-based investors contributed 14.1 percent, according to official data released late on Tuesday.

Inflation Pressure

The weaker auction results came on a day when Russian markets were already under pressure from the 1.4 percent decline in oil, Russia’s main export earner. Yields on government bonds due in January 2028 climbed three basis points to 10.53 percent as of 6:14 p.m. in Moscow, trimming this month’s decline to 42 basis points. The ruble weakened 0.3 percent, and the benchmark Micex Index of equities lost 0.3 percent.

The Bank of Russia, which has trimmed 550 basis points of its key rate this year to 11.5 percent, will reduce it by another 150 basis points by year-end, according to forecasts compiled by Bloomberg. Forward-rate agreements signal a cut of 37 basis points in the next three months.

“Fixed-rate bonds have already priced in quite a lot of rate cuts,” Dmitri Barinov, who manages $2.6 billion of assets at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail. “I am more skeptical and expect inflation to remain stubbornly high. So I like floaters and linkers more.”

While inflation has fallen since touching a 13-year high of 16.9 percent in March, it remains more than 11 percentage points above the Bank of Russia’s 4 percent target. Policy makers delivered a 1 percentage point reduction in rates in June, the smallest since March, as Governor Elvira Nabiullina warned of risks to consumer prices. The ruble has weakened 5.6 percent in the past month.

In the first part of Wednesday’s auction, demand came in for 11.5 billion rubles, or 1.54 times the 2028 bonds eventually sold. This bid-to-cover ratio is the lowest since the April 1 sale of floating-rate 2020 OFZs, data compiled by Bloomberg show. The ministry raised less than half of the 5 billion rubles it targeted in a sale of May 2020 fixed-rate bonds.

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