- Traders are anticipating ‘lavish’ rate cuts, Nabiullina says
- ‘Fewer cuts now, more cuts later’: Nomura International
While the Bank of Russia’s hawkish rates message on Friday sent a chill across fixed-income desks, investors from OppenheimerFunds Inc. to Aberdeen Asset Management see a buying opportunity.
Ruble debt dropped the most in two months after Governor Elvira Nabiullina followed up a widely expected half-point cut to 10 percent with the surprise warning that rates won’t move until at least the start of next year because inflation expectations are still above target. Traders have priced in a “lavish” reduction in rates, she said.
Bond bulls say they’re not changing their strategy on debt that’s posted the third-best returns in emerging markets this year after a recovery in oil prices. Nomura International Plc recommends buying into the belly of the yield curve, Ashmore Group Plc says the decision to keep rates unchanged will boost the appeal of investing borrowed dollars in ruble assets, while Oppenheimer may increase its bond holdings if yields climb further.
Here’s what Nabiullina said about inflation and Russia’s inverted yield curve:
- “Though declining, inflation expectations of business and financial communities still exceed our inflation forecast and the 4 percent target. Having said that, we can see market participants predict a lavish key rate cut. As a result, long-term interest rates fall behind short-term ones. This environment affects monetary conditions and strengthens our concern, because the potential for nominal rate reduction is limited.”
‘Receive the Belly’
Dmitri Petrov, an analyst at Nomura International Plc in London:
- “You need to receive the belly. Three to five years, that’s where market needs to price more easing. Our framework here is simple: fewer cuts now, more cuts later. Easing will come, it’s just that the timing is delayed, and the more it’s delayed, the more easing there will be.”
Viktor Szabo, a money manager who helps oversee $11 billion of emerging-market debt at Aberdeen Asset Management in London, says he’s holding onto OFZ ruble bonds and is weighing buying more:
- “The central bank is clearly not happy with the market running ahead and pricing in an aggressive easing cycle. I still think that the Russian rates story is attractive, though the currency no longer looks cheap here.”
Jan Dehn, head of research at Ashmore Group Plc., which manages about $53 billion of emerging market assets, from London:
- “No, I don’t expect a selloff. She was very hawkish last week, so there was an obvious warning in place. This keeps yields nice and high so the carry is good. Besides, I like that Nabiullina always errs on the side of caution. The speculators that ignored her warning last week are having to unwind positions. This is why the bonds are under pressure. It’s just position squaring. A good time to buy into their selling in my view.”
Nabiullina’s announcement will help the ruble while driving down bond prices for some maturities, said Goldman Sachs Group Inc.’s Clemens Grafe and Andrew Matheny in a note after the decision:
- “The decision supports our stance of being supportive on the ruble, while it challenges our neutral view on the bonds market towards a downward correction at least in parts of the curve.”
The Russian currency traded 1 percent stronger at 64.4725 per dollar as of 5:29 p.m. on Monday, the third-biggest gain in emerging markets. Yields on government ruble bonds due in 10 years rose five basis points to 8.27 percent, the highest since Aug. 29, after a 10-basis point jump on Friday.
Hemant Baijal, the New-York based manager of the $6 billion Oppenheimer International Bond Fund:
- “The Russian central bank clearly came out with a strong statement that they won’t cut rates this year, but they also indicated that they will cut rates further next year. We would look to retain our exposure and potentially increase it if we get any backup in yields, say in the five-year area of the market. They will lower rates again next year, certainly once, possibly twice.”
Jim Barrineau, a New York-based emerging-market money manager at Schroder Investment Management Ltd., which has about $450 billion in assets worldwide:
- “The bonds we own are in the front-end of the curve because we didn’t see a lot of value in the long-end of the curve. I think the market will flatten out from here as opposed to being deeply inverted. We are market-weight Russia in local bonds. There don’t seem to be independent catalysts to make Russia underperform and the yields are still pretty generous.”
Andres Vallejo, an investor at National Asset Management Co. JSC in Moscow:
- “The reaction in OFZs will be short-term. We’ll see a panic in OFZs now, the selloff might last a couple of weeks and yields might rise to 8.3% on 7-8 year OFZs (and 2027), and that’s when it’ll be a good time to buy again. This was basically a verbal intervention on behalf of the central bank to cool off the bond market.”