Russian Bonds Set for Three-Month High as Rate-Cut Bets Increase

  • Traders predicting reduction of as much as 70 basis points
  • Ruble gains most in emerging markets as oil rallies in London

Russian government bonds rose to the highest level since November as wagers on borrowing costs indicate the market is expecting the central bank to cut in the next six months.

The yield on five-year notes fell seven basis points to 9.81 percent as of 5:25 p.m. in Moscow, heading for a 62-basis point decline in the last two weeks. The yield on 10-year bonds declined five basis points to 9.65 percent. The ruble gained 0.9 percent to 74.6980 per dollar, set for the biggest advance in emerging markets this week as stabilizing oil prices underpinned support for the currency. Stocks climbed to a three-month high as oil prices rose to the highest since Jan 4.

The Bank of Russia, which has left the country’s key rate at 11 percent since July, may have room for a cut at its meeting on March 18 after the inflation rate fell to 9.8 percent in January and is forecast by the Finance Ministry to reach8.3 percent in February. Six-month forward-rate agreements show bets for as much as 70 basis points in reductions to the benchmark rate, compared with predictions one month ago for a increase of as much as a quarter of a point.

"The central bank will start to cut rates if not in March, then in April,” said Dmitry Dudkin, head of fixed-income research at UralSib Capital in Moscow. “If the ruble stops weakening, annual inflation will decline to 6 percent."

Oil Advances

Crude oil added 4.6 percent to $36.9 per barrel in London on Friday, set for a gain of 11.6 percent gain this week. Policy makers have said they want to cut borrowing costs to help boost to the economy which is mired in its second year of recession as plunging oil prices force the government to contemplate cuts in spending.

"Despite the dramatic slowdown in the Russian economy, macro fundamentals are still supportive of the ruble," said Luis Costa, head of fixed-income and foreign currency strategy for CEEMEA region at Citigroup Inc. "The ruble should be seen as high-carry alternative to express a positive (or stable) oil price view."

Policy makers reduced the key rate from 17 percent before oil’s plunge pulled the ruble to a record low and pushed up volatility in the currency to the highest behind the Argentine peso.

Government bonds yields imply that annual inflation in a year will decline to 7 percent to 7.5 percent, Rosbank PJSC analysts said. Analysts on average see Bank of Russia bringing the key rate to 10.5 percent in the second quarter and then 9.5 percent by the final three months of the year.

The Micex Index of stocks rose 1.2 percent to 1,825, heading for the highest level in three months. Sberbank PJSC, the country’s biggest lender, and Lukoil PJSC gained more than 2 percent.

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