- Linkers beat bullet bonds as investors seek inflation hedge
- Turkish food ban and ruble tumble create doubt over CPI target
Russian investors caught between an oil rout and a ban on Turkish food are finding a way out in one corner of the bond market: securities that bet rampant inflation won’t go away.
Notes indexed to consumer prices returned 1.2 percent in the past month compared with declines of 0.4 percent on nominal bonds and 7 percent for the Russian currency. Credit Suisse Group AG advises clients buy the so-called linkers over plain-vanilla debt.
“Recent headwinds from a weaker ruble and the economic sanctions on Turkey suggest to us that inflation breakevens are likely to continue to rise,” Nimrod Mevorach, a strategist at Credit Suisse in London, said Tuesday.
Appetite for the notes, whose payouts rise with consumer-price growth, is being driven by investors skeptical that the central bank can rein in inflation running at 15 percent as the ruble slides and limits on Turkish imports make groceries more expensive. Russia’s Finance Ministry sold 13.3 billion rubles ($190 million) of linkers Wednesday, bringing the amount issued since their July introduction to 139 billion rubles. Bids exceeded the amount sold by 1.4 times.
“There’s an enormous number of reasons to expect high inflation and not to believe in the 4 percent target: the ruble weakness, expectations that food prices will rise after the conflict with Turkey,” said Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow. The Bank of Russia is targeting price growth of less than 7 percent by October 2016 and 4 percent in 2017.
President Vladimir Putin banned Turkish goods from chicken to cucumbers after the downing of a Russian warplane near the Syrian border on Nov. 24, calling it a “treacherous stab in the back.” Russia’s economic outlook worsened after oil producers led by Saudi Arabia decided to keep flooding the market during a Dec. 4 meeting, sending Brent crude below $40 a barrel for the first time in almost seven years yesterday.
The ruble strengthened 0.7 percent to 68.91 per dollar as of 6:32 p.m. in Moscow following losses of 21 percent in the last year as oil, the country’s main export earner, tumbled 40 percent and plunged the economy into its worst recession since the global financial crisis in 2009.
While slumping oil hinders recovery, the threat of inflation may prevent the central bank from bringing relief to the economy. Policy makers will probably leave rates on hold at 11 percent for a third consecutive meeting Friday, according to the median of 34 estimates in a Bloomberg survey. They have cut borrowing costs 6 percentage points this year in an effort to shore up the economy and undo last year’s emergency rate increase.
The government downplayed concern measures against Turkey will stoke price growth, saying it will add no more than 40 basis points to the rate between the end of the year and early 2016, “insignificant” in terms of its effect on forecasts. The rate slowed in November to 15 percent from 15.6 percent the previous month.
Paul McNamara, who oversees $4.5 billion in emerging-market bonds at GAM UK Ltd. in London, is confident the central bank will bring consumer-price growth under control. The fund manager said linkers are overvalued because they assume Russian CPI will average more than 7 percent through 2023. He says he prefers fixed-rate bonds due 2023 yielding almost 10 percent.
“I think inflation comes off hard over the next year,” McNamara said Monday. “Turkish food is not remotely as meaningful as European in terms of Russian consumption.”
Inflation is forecast to average 7.9 percent next year, according to economists surveyed by Bloomberg.
Even as inflation slows, the other risks associated with investing Russia will bolster demand for CPI-indexed notes, according to Andres Vallejo, who helps manage the equivalent of $2.6 billion at Kapital Asset Management in Moscow.
“Of course there’ll be demand for inflation linkers as people use it as a hedge against falling oil and weakening ruble,” Vallejo said by phone on Monday.