Russian Bond Rally Stalling as Deutsche Bank Joins Rate Skeptics

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Russia’s world-beating government-bond rally showed signs of fatigue as Deutsche Bank AG and Rabobank added their voices to those suggesting the central bank might keep rates on hold next week amid quickening inflation.

If the Bank of Russia does lower the key rate on July 31, it will probably be by no more than 50 basis points, the smallest amount since in January, Deutsche Bank analysts Yaroslav Lissovolik and Artem Zaigrin wrote in a research note. The German lender estimates that Russian consumer-price gains accelerated to 16 percent last week from 15.3 percent in June.

Rate cuts of 550 basis points drove a 30 percent return on local-currency Russian government debt this year, the most globally. The ruble has weakened 3.7 percent in July as oil dropped and the central bank bought foreign currency to bolster its reserves, adding to inflationary pressures.

“The bond market has started pricing a much more hawkish central bank lately,” Roman Dzugaev, a fixed-income trader at BFA Bank in St.Petersburg, said in e-mailed comments. “A 50 basis-point cut is still probable, but I think they won’t cut.”

The yield on five-year Russian government bonds rose by three basis points to 10.75 percent at 5:26 p.m. in Moscow, bringing the increase in the past four days to 26 basis points. The ruble was weakened 0.2 percent to 57.5450 against the dollar.

The Bank of Russia will reduce its key rate by 50 basis points to 11 percent next week and a further 100 basis points by year-end, according to forecasts compiled by Bloomberg. Forward-rate agreements signal a cut of 33 basis points in the next three months.

Slower Cuts

While the ruble is down 15 percent since touching a six-month high in May, it remains 5.7 percent stronger this year, the best performer among 24 emerging-market currencies tracked by Bloomberg. Brent crude, the benchmark for Russia’s biggest export, was little changed at $56.09 a barrel today, down from a 2015 high of $69.63 on May 6.

“With oil trading 19 percent below the year-to-date high and the ruble trimming its impressive gains against the hard currencies, we expect the Bank of Russia to slow down the pace of interest rates cuts in the second half of the year starting with a 50 basis-point move to 11 percent on July 31,” Piotr Matys, an emerging-market strategist at Rabobank in London, wrote in a research report Thursday.

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