Russia’s Local Bonds, Ruble Sink as Crude Oil Extends Retreat

The ruble weakened and Russia’s local bonds fell, driving the yield on notes due 2027 to the highest in 12 weeks as sinking crude prices curbed appetite for assets in the world’s biggest energy exporter.

The yield on OFZ bonds rose nine basis points, or 0.09 percentage point, to 7.20 percent, the highest since Nov. 29. The ruble weakened 0.7 percent to 30.39 against the dollar by 4:12 p.m. in Moscow. It strengthened 0.2 percent to 40.0350 versus the euro, leaving it down 0.2 percent against the central bank’s target dollar-euro basket at 34.7303.

Crude oil, Russia’s main export earner, lost 1.5 percent to $93.82 a barrel, extending the biggest decline in three months. Federal Reserve meeting minutes released yesterday sparked concern the U.S. may curtail stimulus, curbing demand for riskier, emerging-market assets.

The oil drop is a “negative signal for the Russian bond market,” BCS Financial Group analysts led by Leonid Ignatiev wrote in an e-mailed note. It can “hurt the placement of currently marketed offerings as well as stoke the correctional mood on the secondary market,” they said.

Ruble-denominated government debt rallied in the second half of 2012, lowering the yield on the 2027 notes by 225 basis points from a 52-week high in June to a record low on Jan. 10 on bets that easier foreign access would boost demand. The yield rose in the second half of January and February.

No Support

Sberbank CIB said it’s closing a recommendation to buy long-maturity OFZ bonds. “At current levels there is no significant support for the sovereign yield,” analysts led by Alexander Kudrin said in an e-mailed note.

Russian exporters will use the weaker ruble as an opportunity to buy the local currency to pay taxes, according to analysts at OAO Rosbank.

“Market participants won’t hesitate taking advantage of newly opened opportunities,” Rosbank analysts led by Vladimir Kolychev said in an e-mailed note. The demand will keep the ruble rate against the basket close to the 34.65 level where the central bank may intervene to curb gains, they said.

Bank Rossii purchased 3.42 billion rubles ($113 million) of foreign currency from Feb. 14 to Feb. 19.

Before it's here, it's on the Bloomberg Terminal.