Russian Credit Risk Rises as Traders Bolster Defense Against Fed

The cost of buying default insurance on Russian bonds rose for a fourth day as investors seek to protect themselves from losses triggered by speculation the U.S. Federal Reserve is preparing to raise interest rates.

Five-year credit default swaps rose three basis points to 233, the highest level since Aug. 3. The ruble declined 0.9 percent to 64.465 per dollar by 4:25 p.m. in Moscow as crude oil fell 2.7 percent to $49.51 per barrel in London trading.

Russian assets have been flooded with fund inflows from investors in developed markets looking to escape negative yields engineered by central banks to spur lending. A reversal of easy-money policies would undermine this demand and traders are on alert for indications by Fed Chair Janet Yellen that a rebounding U.S. economy warrants a rate increase when she speaks Friday at an annual symposium in Jackson Hole, Wyoming.

"So far investors’ expectations are quite comfortable for markets, but any hints the Fed is taking a tighter stance on monetary policy may trigger a correction," Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow, said by e-mail.

There was a 51 percent chance the U.S. central bank will increase rates this year as of Friday, up from 36 percent at the end of July and a 45 percent probability a week ago, futures data compiled by Bloomberg show.

The benchmark Micex index of Russian stocks swung between gains and losses before trading 0.2 percent higher at 1,963. JPMorgan Chase & Co. closed its overweight recommendation on Russian stocks initiated less than a month ago, shifting to a neutral stance because of a stunted recovery in oil prices. This still implies performance in line with general emerging markets, poised to gain 15 percent by the end of the year, strategist David Aserkoff wrote in a note to clients.

Government bonds declined, with the yield on a note due February 2027 rising three basis points to 8.35 percent.

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