Russian Bonds in Worst Week Since January as Inflation Creeps Up

  • Yield on five-year OFZ bonds rise 33 basis points in week
  • Russian inflation accelerated to 7.5% in June from 7.3%

Russian government bonds suffered their worst weekly performance in six months after oil retreated and accelerating inflation raised concern the central bank will be forced to slow the pace of rate cuts.

Five-year OFZ bonds had their biggest five-day drop since mid-January, driving the yield up 33 basis points. While debt fell, the ruble climbed with rising crude prices on Friday.

An emerging-market rally has faded during the week after investors betting that global central banks will pursue further stimulus to counter the fallout of Britain’s vote to leave the European Union drove up asset prices. A slowing of the year’s rebound in crude prices during June and quicker price growth last month reduced prospects for rapid monetary easing.

"Expectations for an inflation slowdown and central bank rate cuts have cooled," Alexey Tretyakov, a bond fund manager at Aricapital asset management in Moscow, said by e-mail. "The central bank will most likely continue to cut, but with rates incompatible with previous expectations of investors who drove the OFZ yields close to 8 percent."

Annual inflation in Russia rose to 7.5 percent in June from 7.3 percent in the previous month, the first uptick since August, data this week showed. Expectations for further price rises in June are “elevated,” the central bank said on Thursday. While Russia’s central bank Governor Elvira Nabiullina cut the key rate by 50 basis points last month, she warned that future reductions will depend on trends in price growth.

Government bonds fell for a fifth day, increasing the yield five basis points to a two-week high of 8.88 percent on five-year notes by 7 p.m. in Moscow. The ruble traded 0.3 percent stronger at 63.8 per dollar, helped by gains in Brent crude. Oil and natural gas account for about 60 percent of Russia’s export earnings. The Micex stock index was 0.6 percent higher, taking the week’s decline to 0.1 percent.

“The second wave of worries about the implications of Brexit, European banks and prospects for commodities prices has finally reached OFZs, lowering appetite from foreign investors," Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said by e-mail.

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