Russian Bonds Rise as JPMorgan Sees Dovish Policy Tilt Tomorrow

  • Central bank seen softening language even with no rate change
  • OFZs are second-best local currency bonds since oil's trough

Russian bonds extended gains as JPMorgan Chase & Co. economists bet the central bank will signal it’s more willing to put rate cuts back on the table after an eight-month pause when it meets Friday.

The yield on five-year government bonds declined for a third day, dropping 12 basis points to 9.18 percent, the lowest since March 22 on a closing basis. The ruble strengthened 0.9 percent to 64.569 against the dollar by 6:25 p.m. in Moscow as crude oil advanced in London, after rebounding almost 70 percent from a record low in January.

Bets that the Bank of Russia will switch back to an easing path have fueled the world’s second-best rally in local bonds. Even as economists forecast Russian central bank chief Elvira Nabiullina will leave benchmark borrowing costs at 11 percent tomorrow, they see 150 basis points of reductions in the second half of the year. Nabiullina has resisted rate cuts that would relieve an economy in its second year of recession after turmoil in the currency markets threatened to stoke inflation.

“The language of the statement may soften to reflect the progress with disinflation and positive momentum in commodity and financial markets,” said JPMorgan economist Anatoliy Shal, who along with 31 other economists, expects no cut on Friday.

Driving Seat

Sovereign ruble debt has rebounded in tandem with oil since Jan. 20, handing investors 32 percent in dollar terms, the biggest gains in the world after Brazil in a Bloomberg index tracking emerging-market bonds in their local currencies.

"Oil remains in the driving seat," said Fedor Bizikov, manager of bond portfolios at GHP Group in Moscow, who expects the bank to ease by 50 basis points tomorrow. "Investors are pricing in the possibility the central bank will be forced to cut rates earlier than it has indicated because of the current trend in oil prices.”

The Micex Index of shares traded 1.4 percent higher at 1,962.45.

The risk around government bonds is “more balanced” and yields are likely to hold at current levels even if Nabiullina doesn’t cut on Friday, Morgan Stanley Inc. analyst Min Dai said in an e-mailed note. Annual consumer-price growth slowed to a two-year low of 7.3 percent in March compared with the central bank’s 4 percent target for the end of 2017.

The bond market is pricing in as much as 250 basis points of rate cuts, reflecting “the fact that inflation will drop quickly in 2016 and 2017,” Dai said.

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