Russian government bonds have already posted the worst performance in emerging market debt this year. Anastasia Shamina, head of fixed-income trading at Credit Suisse Group AG in Moscow, is bracing for deeper losses.
Shamina, who correctly predicted a rally in Russian bonds at the start of last year would lose steam, said yields on government bonds in rubles would need to rise at least 1 percentage point to offset rising risks in the economy -- from the widest deficit in five years, to slowing demand for energy from its biggest trading partner China, to the danger of inflation quickening. Yields on Russia’s ruble OFZ bonds due in 2023 rose by 68 basis points since the start of the year to 10.41 percent. That compares with the Bank of Russia’s seven-day repo auction rate of 11.75 percent.
“OFZ yields 100 basis points lower than the repo rate don’t take into account the potential risks of rising budget deficit and crisis in China,” Shamina said Monday in an interview. Credit Suisse was the most active OFZ trader on the Moscow Exchange in January after state-controlled Sberbank, data from the bourse show.
Russian government bonds in rubles are the worst performers in emerging markets this year, dragged down by havoc in the currency market that has undone the forecast for lower rates and slower inflation. OFZs have lost 8.3 percent in dollar terms so far this year, according to data compiled by Bloomberg, compared with a gain of 12 percent in 2015.
Policy makers are highlighting the risk to consumer prices from the ruble’s 6.3 percent depreciation, which makes imports more expensive. At their last meeting Jan. 29, they retracted a pledge to continue monetary easing, warning instead of a possible rate increase. While inflation slowed to 9.8 percent in January, economists surveyed last month revised their year-end forecast to a median 8.3 percent from 7.6 percent.
“The more hawkish tone from the central bank is not just empty words,” said Shamina. “The central bank will adopt a wait-and-see approach at least until the end of the second quarter.”
Fiscal concerns are also weighing on the bond market. Oil prices at a 12-year low will make it harder for Russia to contain its planned budget shortfall to 3 percent of gross domestic product in 2016, amid the continuing threat of a financial crisis in China that would ripple across emerging markets, Shamina said.
“Given the deterioration of living standards in the country, political motivations could prevail, driving the deficit above the target,” she said.