Russian Yield Curve Inversion Lessens on Bets Rates to Normalize

  • Two- and 10-year yields get closer as short-term risks ease
  • Return to normal steepness needs successive cuts: Aton

Russia’s debt curve, inverted for the last 17 months, is returning to a normal concave shape before policy makers are seen kicking off an easing cycle to direct monetary policy back toward pre-crisis levels.

Two-year yields are falling relative to longer-dated notes, signaling policy makers are ready to erase the emergency rate increase they imposed in December 2014 to arrest a freefall in the ruble. The spread between two- and 10-year yields narrowed to 52 basis Thursday, the least since May 10.

The curve has started flattening but has not yet resumed a normal, steep shape. That will happen when easing is in full swing, according to Yakov Yakovlev, a fixed income analyst at Aton LLC in Moscow. The Bank of Russia is seen cutting its benchmark 50 basis points to 10 percent Friday, the first of a series of reductions to 8 percent by September 2017, according to economic forecasts.

"In order for the bond curve to return to its normal shape the market should probably gain confidence the central bank has started the easing cycle -- that rates will be cut at several successive meetings," Yakovlev said. 

At every meeting this year except on June 10, central bankers demurred from easing to avoid fanning inflation running at more than twice their medium-term target. In doing so, policy makers delayed giving stimulus to an economy in its second year of recession.

At their peak on July 1, two-year notes yielded 104 basis points more than 10-year notes, an inversion that shows investors see elevated short-term risks. In a normal yield curve, longer-dated debt pays higher yields to compensate for the risk that inflation erodes the value of the securities more over a longer period of time. Short-dated bonds in theory pose less risk, and typically offer lower yields as compensation.

The ruble gained 0.3 percent to 64.96 per dollar at 4:43 p.m. in Moscow. The Micex Index of major stocks fell 0.6 percent to 1,994.23.

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