Yield Hunters Targeting Russia Drive Wedge Into Ruble’s Oil Link

  • Correlation between currency and crude falls to seven-week low
  • Russian government local bond rally extends into fourth day

The ruble’s correlation with oil fell to a seven-week low as global investors seeking higher-yielding assets ignored weakness in Russia’s biggest export earner.

The extent to which Russia’s currency moves in the same direction as oil declined to 0.55 on Tuesday, down from 0.64 a month ago, according to data compiled by Bloomberg. The ruble has been outperforming crude this quarter as money flowing into emerging markets at a record pace has favored Russian bonds that offer higher returns. The currency was little changed at 64.6075 by 5:44 p.m. in Moscow as government debt rallied for a fourth day.

Capital flows "remain favorable for the ruble," Dmitry Polevoy, ING Groep NV’s senior economist for Russia, said in e-mailed comments. "But any external instability could ruin this balance of flows."

Carry traders who borrow in dollars to buy ruble-denominated debt have taken home 21 percent returns this year, benefiting from benchmark interest rates that surpass 10 percent in Russia. That’s distracted attention away from the ways that oil’s slide in the past year has worsened the government’s budget deficit and exacerbated a recession.

"Given the high local interest rates, local ruble bonds have become extremely popular, which has driven a wave of new portfolio flows into the country," Luis Costa, Citigroup Inc.’s head of fixed-income and foreign-currency strategy for central and eastern Europe, the Middle East and Africa, said by e-mail.

The yield on 10-year Russian debt fell 3 basis points to 8.32 percent. Ruble bonds have returned 23 percent in dollar terms this year in part as the central bank cut interest rates to shore up the economy. The Micex Index of stocks was unchanged at 1,956, within 13 points of a record high.

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