Russian Bonds Cap 2nd Week of Declines on Rate Outlook, Ukraine

Russian government bonds capped a second weekly decline as investors and traders increased bets that monetary policy will remain tight until the fourth quarter.

Ruble-denominated bonds due February 2027 fell for the first time in three days, sending the yield up one basis point to 8.62 percent by 7:35 p.m. in Moscow, six basis points higher in the week. The ruble weakened less than 0.1 percent to 34.4170 per dollar by 6 p.m., when the central bank ceases its operations. It has gained 0.1 percent since June 13.

Russia raised its benchmark one-week auction rate to 7 percent from 5.5 percent in February and to 7.5 percent in April to stabilize the ruble amid international condemnation of President Vladimir Putin’s actions in Ukraine. The central bank’s view on monetary policy carries a “clear hawkish bias, with no mention of potential rate cuts,” Vladimir Pantyushin, a strategist at Sberbank CIB in Moscow, said in an e-mailed note after meeting First Deputy Chairman Ksenia Yudaeva.

“Local players are reducing their bets on OFZs as a rate reduction seems off the agenda, at least until autumn,” Dmitry Dorofeev, a money manager at BCS Financial Group in Moscow, said by e-mail.

Analysts surveyed by Bloomberg predict a 50 basis-point rate cut by the central bank in the fourth quarter. Yudaeva reiterated that the current policy rate of 7.5 percent is “the right one, while an acceleration in inflation would force the bank to consider further hikes,” Pantyushin said.

Ruble Weakness

Russian government bonds also don’t look cheap in comparison with dollar-ruble swaps, which may serve as a benchmark for foreign investors in Russian securities, Konstantin Artemov, money manager at Raiffeisen Asset Management in Moscow, said in e-mailed comments. The premium of 2027 OFZ bonds to five-year swaps narrowed to 75.4 basis points from 158 basis points at the beginning of the year.

“I’d abstain from buying OFZs for now -- they aren’t very appealing for any marginal investor,” Artemov said.

The ruble gained 0.1 percent to 46.7425 against the euro and less than 0.1 to 39.9618 against the central bank’s target dual-currency basket.

The currency has weakened 4.7 percent against the dollar since the beginning of the year, the third-worst performance among 24 emerging-market peers tracked by Bloomberg.

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