Ruble Weakens as Bond Yields Drop Toward Record on Rate Cut Bets

The ruble weakened against the Russian central bank’s target basket of currencies and government bonds extended gains for a fourth day on speculation the central bank will cut its main interest rates.

The ruble depreciated 0.3 percent against the basket to 35.9743 by 6 p.m. in Moscow, according to Bloomberg calculations based on bourse data. It lost 0.4 percent versus the dollar to 31.6700. The yield on OFZ bonds due February 2027 fell four basis points, or 0.04 percentage point, to within 10 basis points of a record-low of 6.84 percent on January 10.

Bank Rossii Chairman Sergey Ignatiev said yesterday that interest rates may fall should inflation slow. The “trend” toward a decline in rates will probably continue after some secondary market rates were cut on April 2, he said. Crude slid 1 percent to $99.44 a barrel in London, retreating for the first time in four days. Revenue from sales of crude and natural gas comprise about 50 percent of Russia’s state budget income.

“Oil is down, and in general the external market conditions aren’t very stable,” Alexei Egorov, an analyst at OAO Nomos Bank, said by phone from Moscow. “Given the bond yields, the investors appetite is still there, but it doesn’t help the ruble.”

Currency trading was halted today from 3:50pm to 4:40pm in Moscow because of a software malfunction, the Moscow Exchange said in a website statement.

Slowing Inflation

As the annual inflation rate fell to 7 percent in March, from 7.3 percent in February, the central bank cut rates on gold-backed loans and some longer-term Lombard operations by 25 basis points. Bank Rossii will lower the refinancing rate 25 basis points this quarter to 8 percent, according to the median forecast of 13 economists surveyed by Bloomberg.

The ruble’s performance has decoupled from the ruble-denominated debt, as investors hedge their exposure to OFZs by using short-term non-deliverable forwards to benefit from bond gains, according to Maxim Korovin and Anton Nikitin, analysts at VTB Capital in Moscow.

“Many investors view OFZs more like a rate story,” they said in an e-mailed note to clients today.

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