Russian Yields Drop to Six-Week Low on Nabiullina’s ‘Bazooka’

The yield on Russia’s five-year government bond fell to the lowest level since May as the central bank announced a new refinancing facility for lenders that may spur their appetite for government debt.

Bank Rossii, which met for the first time under Chairman Elvira Nabiullina, introduced a one-year floating-rate repo facility with a starting cost of 5.75 percent, compared with a 7.5 percent rate on similar fixed-rate loans it gives to commercial lenders. It kept all key interest rates unchanged, including the overnight repo rate at 5.5 percent.

“The central bank rolls out the MTRO bazooka,” Vladimir Kolychev, economist and strategist at OAO Rosbank in Moscow, said in e-mailed comments, referring to European Central Bank’s long-term refinancing operation, a process by which the ECB provides financing to euro-region banks.

The yield on OFZs due March 2018 tumbled 15 basis points to 6.45 percent, the lowest level since May 30. It declined 66 basis points this week, the biggest fall since October 2011. The yield implied from 12-month currency swaps dropped 13 basis points to 6.09 percent, as the ruble weakened 0.2 percent to the dollar-euro basket to 37.1481 by 7:55 p.m. in Moscow.

It’s “very positive for the local bonds market, as it creates a completely new, longer-term funding source for OFZs,” Vladimir Osakovskiy, chief economist for Russia at Bank of America Merrill Lynch in Moscow, said by e-mail.

“It’s also positive for banks, which will most likely find this source of funding very appealing for further lending and fixed-income positioning,” he added.

Slowing Inflation

Bank Rossii said it will continue to monitor economic slowdown risks and said consumer price growth slowed to 6.6 percent as of July 8 from 6.9 percent in June, approaching the bank’s 5 percent to 6 percent inflation target.

“The market had priced in the rate cut, so the first reaction was a disappointment, but the central bank confirmed lower inflation, so the rate cut is possible as soon as next meeting,” Dmitry Igumnov, head of fixed income trading at BCS Financial Group in Moscow, said by e-mail.

The ruble declined 0.5 percent against the dollar to 32.6785, paring the weekly increase to 1.9 percent, the biggest since November 2012.

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