Russian Bonds Head for Biggest Six-Week Gain in Emerging Markets

  • Contained inflation opens door to rate cut: Morgan Stanley
  • Danske says OFZs look appealing amid bets for more than 50 bps

Russian government bonds headed for a sixth week of gains that outstripped those of major emerging markets as slowing inflation renewed bets for monetary easing.

The yield on local-currency OFZs due February 2027 fell five basis points to 8.18 percent, taking the decrease to 45 basis points since July 22, the most among 25 peers tracked by Bloomberg. The ruble extended gains while stocks reached a new record after worse-than-expected jobs data in the U.S. bolstered the case for a longer pause on rates and drove appetite for riskier assets.

The Bank of Russia’s inflation expectations in August fell to the lowest level since October 2014, according to a report published by its research department Thursday. That may be the green light for the central bank to reduce interest rates at its next meeting on Sept. 16, according to Morgan Stanley Inc.

"Well-behaved inflation" will coax the central bank back to easing, Morgan Stanley economist Alina Slyusarchuk said in an e-mailed report.

Baked In

The central bank held its key rate at 10.5 percent in July to avoid spurring price growth as the ruble weakened, halting a cycle of cuts forecast to bring borrowing costs down to 8 percent by the third quarter next year.

The ruble advanced 1.1 percent against the dollar to 65.225 by 5:16 p.m. in Moscow as crude oil gained 2.1 percent in London to $46.39 per barrel. The Micex index of major stocks rose 1.2 percent to 2,000.86 after a report showed American companies hired about 29,000 workers fewer than estimated by economists for August.

Bond market gains reflect rising expectations that the Bank of Russia’s next rate reduction will exceed 50 basis points, said Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki, who recommends boosting exposure.

"A 50 basis-point cut is fully priced in,” he said. “Taking into account expectations of a moderate ruble strengthening, OFZs look an appealing instrument."

Not all analysts are persuaded the rally will endure. OFZs may come under pressure from more borrowing if oil revenue can’t cover budget spending, according to Bank of America Corp.

The bank is turning "from bullish to neutral" and recommends "trimming optimism" in OFZ bonds, Arko Sen, Bank of America’s strategist for EMEA region debt and FX, said in a research note.

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