Russia Cancels Bond Auction as Rate Outlook Drives Up Yields

Russia abandoned the sale of $1.1 billion of ruble bonds, the first cancellation of an auction since October, after yields surged on concern policy makers will refuse to lower interest rates to bolster growth.

The Finance Ministry planned to offer 33.6 billion rubles ($1.1 billion) of December 2019 OFZ bonds in today’s auction at a yield range of 6.33 percent to 6.38 percent. The yield jumped five basis points, or 0.05 percentage point, to 6.47 percent by 4 p.m. in Moscow, the highest in almost two weeks, after rising six basis points yesterday.

“Expectations of monetary easing by the central bank have not come true so far,” Anton Nikitin, an analyst at VTB Capital, said by phone in Moscow. “Many positioned themselves with the idea that the monetary easing will be rather aggressive and fast.”

Bank Rossii kept its main interest rates unchanged for the eighth straight month on May 15 citing elevated inflation, which quickened to 7.2 percent in April. First Deputy Chairman Alexei Ulyukayev said at an investment conference in London yesterday that “the situation from the economic point of view has more or less stabilized” and further easing isn’t warranted.

The yield on Russia’s ruble bonds due February 2027 fell 55 basis points, or 0.55 percentage point, last month to a record 6.80 percent as investors bet the regulator would cut rates to boost an economy that’s expanding at the weakest pace since a 2009 contraction. The yield has risen 29 basis points this month. The ruble strengthened 0.2 percent to 31.1770 against the dollar today.

Slowing Growth

Russia’s economy may expand as much as 3 percent this year, Ulyukayev said. That would be the slowest pace since 2009, when gross domestic product shrank 7.8 percent, data compiled by Bloomberg show.

Industrial output slowed less than forecast in April, growing 2.3 percent from a year earlier after a 2.6 percent increase in March, the Federal Statistics Service in Moscow said today in an e-mailed statement. The median estimate of 21 economists in a Bloomberg survey was for a 2 percent increase.

While President Vladimir Putin has urged ministers to boost the economy and policy makers from Poland to India reduced borrowing costs to aid growth, Bank Rossii has held the refinancing rate at 8.25 percent since September with inflation at least one percentage point above its target this year.

U.S. Stimulus

Any monetary easing is “likely to worsen the situation,” former Finance Minister Alexei Kudrin said at a conference organized by VTB Capital yesterday. Russia needs “structural measures” and the economy of the world’s largest energy exporter remains too dependent on oil, he said.

Russia issued almost all the debt it offered at last week’s auction after selling out at the three previous offerings. The 2019 notes yielded 6.36 percent on May 20, the day before the ministry gave the guidance, data compiled by Bloomberg show.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell four basis points to 181, according to JPMorgan indexes. The difference compares with 168 for notes of Mexico and 180 for Brazil.

Appetite for Russian bonds is waning as some investors speculate U.S. monetary stimulus will be scaled back, Dmitriy Gritskevich, an analyst at OAO Promsvyazbank said yesterday.

U.S. Federal Reserve Bank of New York President William C. Dudley said policy makers will know in three to four months whether the economy is healthy enough to overcome federal budget cuts and allow the central bank to begin reducing record stimulus.

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