Widest Russia Interest Rate-Cut Wagers This Year Spur Bond Rally

  • Finance Ministry sells out largest auction of debt in 2 years
  • Traders see 40 basis points of cuts in next three months

Russian government bonds were little changed with yields at a 17-month low, as bets by traders for a cut in borrowing costs in the next six months rose to the highest this year.

Yields on five-year government notes known as OFZs traded at 9.53 percent as the government sold out the largest weekly debt auction in two years. The ruble weakened 0.6 percent against the dollar by 6:25 p.m. to 73.75 as crude fell 0.5 percent in London trading to $36.68 per barrel.

Forward-rate agreements show the market is expecting interest rates to fall as much as 40 basis points in the next three months. Policy makers may have room for the first cut in their benchmark rate of 11 percent since July at the next meeting on March 18 after the inflation rate fell to 9.8 percent in January and is forecast by the Finance Ministry to reach 8.3 percent in February.

"The outlook for rate cuts is brightening,” said Dmitry Dudkin, head of research at UralSib Capital. “Forward-rate agreements are now pointing at cuts and this is notable.” Dudkin expects the central bank to leave borrowing costs unchanged this month and then cut 50 basis points in April.

Weekly inflation numbers published Wednesday by the Federal Statistics Service point to a "sharp moderation" in annual inflation to at least 8.3 percent in February from 9.8 percent in January, said Dmitry Polevoy, chief economist for Russia and CIS at ING Groep NV in Moscow.

Yields on five-year OFZs have declined 56 basis points in five days amid a 2.5 percent gain in the ruble as Brent crude, used to price Russia’s main export blend, pushed past $36 a barrel. The government on Wednesday sold all 20 billion rubles ($271 million) of floating-rate bonds due January 2025 and all 15 billion rubles of fixed-coupon bonds due August 2021.

"The ruble appreciation during recent trading sessions came on the back of stronger oil and inflow of international money into OFZs," said Levon Atanasyan, a foreign currency trader at Renaissance Capital in Moscow. "Now that oil stopped rallying and inflows have paused on the back of the ongoing OFZ auction, the ruble is correcting. If oil doesn’t resume its rally, the current ruble level looks fragile and it may weaken from here," Atanasyan said.

BlackRock Inc., one of the world’s largest asset managers, has been overweight Russian OFZ bonds and is "very positive" on Russia’s fundamentals even with current oil prices. The company sees OFZ’s “paying you for the risk you are taking,” Sergio Trigo Paz, head of emerging markets fixed income at BlackRock, said on Tuesday.

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