Russia’s Two-Year Bond Yields Drop to Record as Investors Switch

Russia’s two-year ruble debt rallied, pushing yields to a record low, as investors switched to shorter notes after inflation accelerated in January and the central bank kept interest rates on hold.

The yield on so-called OFZs due June 2015 fell three basis points, or 0.03 percentage point, to 5.98 percent, before climbing to 6 percent by 7 p.m. in Moscow. The ruble added 0.2 percent to 34.6512 against the central bank’s dollar-euro currency basket.

Euroclear Bank SA, which operates the world’s biggest bond settlement system, plans to begin exchange-based operations with ruble-denominated government debt next month after starting over-the-counter settlements on Feb. 7. Crude oil, Russia’s main export, gained as much as 0.1 percent to $118.02 per barrel in London. Russia’s inflation rate rose in January to 7.1 percent.

“Liberalization has come, but new money is not coming against the current background, so hedge funds take profits and switch into short maturity,” Dmitry Dorofeev, fixed income strategist at BCS Financial Group, said by e-mail.

“Non-residents now prefer short bonds with maturity up to five years.”

A faster pace of price growth stokes appetite for shorter-duration OFZs, Denis Poryvay, analyst at Raiffeisenbank International AG, said by e-mail.

“At the moment the nominal yield on 10-year OFZs is below inflation,” Poryvay said.

The monthly tax period, when exporters sell foreign-currency export revenue to pay local-currency duties, starts tomorrow, potentially driving the ruble beyond 30 to the dollar, ING Groep NV analyst Dmitry Polevoy said by e-mail.

The ruble weakened 0.2 percent against the dollar to 30.1195. The euro fell almost 1 percent against the dollar to 1.3339 after the euro-area economy contracted 0.6 percent in the fourth quarter. That exceeded the 0.4 percent median forecast of economists in a Bloomberg survey.

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