- OFZs lose 9.4% in USD terms in 2016 for worst return in EM
- Raiffeisen turns bearish as oil slump paralyzes easing cycle
Faced with a dilemma of paying double-digit bond yields or falling short of its fundraising target, Russia is opting for the latter.
As inflation pressures drive up average yields at government auctions, the Finance Ministry is selling less than the 25-billion ruble ($323 million) weekly average it would need to attain its first quarter of goal of 250 billion rubles. A sale Wednesday brought the amount borrowed to 63 billion rubles so far in the first quarter, meaning the tally for February and March will have to average 93.5 billion rubles.
"The Finance Ministry didn’t want to appear too soft and offer the market a price discount,” Yury Tulinov, the head of research at Societe Generale’s Rosbank PJSC unit in Moscow, said by e-mail. “Otherwise, there’s a big risk that investors will expect a bigger yield premium at each subsequent auction. For the Finance Ministry, its quarterly borrowing plan is less important than forming the market’s expectations."
January’s issuance slump risks making Russia’s 1 trillion-ruble 2016 sales target harder to attain as the government seeks to close its biggest budget gap as a percentage of economic output since 2010. Finance Minister Anton Siluanov warned this month that the rainy-day fund Russia uses to finance its deficit is at risk of being depleted by the end of the year after oil, the main export earner, traded at less than $30 a barrel for the first time since 2003. To meet his budget targets, Siluanov said he’d rather make fiscal adjustments than saddle the economy with debt at current yields.
Wednesday’s government auction featured yields of 14.39 percent and 13.98 percent for notes maturing in 2025 and 2020. That compares with an average auction yield of 10.82 percent in the fourth quarter, according to Finance Ministry data. The government accepted bids on just 11.2 billion rubles of the longer-dated notes, selling 69 percent of the amount offered.
“Many investors were bidding below the market because of high volatility,” Vadim Vedernikov, fixed-income analyst at Russian Agricultural Bank in Moscow, said by e-mail. “With the shorter bond the Finance Ministry offered about 20 basis points concession to the market, and that allowed them to sell out.”
Investors in ruble-denominated government bonds known as OFZs have seen their 2015 returns of 12 percent almost erased this year. Since touching a record intraday low of 85.999 on Jan. 21, Russia’s ruble has jumped 8.2 percent as the price of crude, the nation’s biggest export earner, recovered.
Raiffeisen Bank International AG turned "more bearish" on OFZ debt following the latest weakness in the ruble, citing the diminishing likelihood of rate cuts, Stephan Imre, a Vienna-based economist at Raiffeisen Bank International AG, said Tuesday.
Inflation at more than three times the central bank’s medium-term target of 4 percent is paralyzing Russia’s easing cycle and disappointing investors. The ruble’s volatility threatens to keep consumer prices inflated, prompting policy makers to delay rate cuts expected by the bond market. Policy makers will abstain from reducing the benchmark rate of 11 percent for a third consecutive meeting on Friday, according to all 42 analysts in a Bloomberg survey.