Foreigners Pile Into Ruble Bonds Betting Policy Resolve to Break

  • BNP Paribas, GAM position for first rate cut since July 31
  • Economists evenly split on outcome with 21 seeing no change

International fund managers are snapping up Russian local currency bonds on bets that Friday will be the day Elvira Nabiullina breaks her ten-month resolve against easing monetary policy.

So-called OFZs are drawing investors at BNP Paribas SA, Amundi Asset Management and GAM UK Ltd., while economists are split on the outcome of the meeting and whether Russian policy makers led by Nabiullina are convinced inflation is tame enough to lower interest rates and kick-start an economy slogging through a second year of recession. Stabilizing oil prices and the ruble’s comeback this year may tip the balance in favor of a rate cut even as inflation remains almost double the central bank’s 2017 goal.

Expectations the central bank will restart monetary easing and a strengthening ruble have seen OFZs hand investors a 22 percent return this year. Even after the yield on Russian 10-year notes fell to 8.7 percent, the lowest since the nation was hit with international sanctions over its role in the Ukraine conflict in July 2014, they are still “too cheap” according to Paul McNamara, who oversees $4.5 billion in emerging-market debt at GAM in London.

“We expect the central bank to resume rate cuts, which would be positive for the OFZs," McNamara said. He shifted to an overweight position in May and added to his holdings this week.

Russian Orthodoxy

The Bank of Russia has refrained from monetary easing for almost a year as it sticks to its inflation-targeting mandate. That’s won Nabiullina the title of developing Europe’s most-orthodox central banker, according to Morgan Stanley, and left almost half the economists surveyed by Bloomberg doubting that the bank is ready to adjust its cautious stance.

“Inflation has surprised on the downside, and with a solid oil environment and stable ruble, this would be a good opportunity to allow some economic easing," said Bryan Carter, head of emerging markets fixed income in London at BNP Paribas. He said he’s been buying OFZs in the belief policy makers will reduce borrowing costs this week.

The median forecast of economists is for 150 basis points of rate cuts in 2016, bringing the key rate to 9.5 percent by December. The Bank of Russia last lowered borrowing costs on July 31, 2015.

No Excuse

GAM and BNP Paribas join traders betting on a cut, with forward-rate agreements show derivatives traders are predicting 69 basis points of cuts in the next three months as of 5 p.m. in Moscow, the most since March 24.

Price growth was unchanged for a third month at 7.3 percent from a year earlier, the slowest pace since 2014, the Federal Statistics Service said on Monday. A possible uptick in price growth forecast by the central bank has so far failed to materialize.

The slowdown “is going to provide significant scope for the central bank to cut rates,” said Abbas Ameli-Renani, emerging markets strategist at Amundi Asset Management in London. He said his firm has been adding ruble debt in the past month and it now represents one of its “biggest overweights.”

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