Ruble Bonds Fall in Fourth Weekly Drop on Surprise Rate Increase

Russian government bonds declined, capping a fourth week of losses after the central bank unexpectedly raised its key interest rate.

The yield on February 2027 securities rose 15 basis points to 9.29 percent as of 6 p.m. in Moscow, extending this week’s increase to 25 basis points. The ruble weakened 0.2 percent to 35.1030 per dollar, paring the gain in the five-day period to 0.1 percent.

The central bank increased the one-week auction rate by 50 basis points to 8 percent, with all but one of 23 economists surveyed by Bloomberg predicting the rate would be kept unchanged. The central bank said it’s ready to continue to raise rates “if high inflation risks persist.” Moody’s Investors Service and Fitch Ratings will announce their decisions on Russia’s sovereign rating today.

“Local bonds are logically getting massacred -- the press-release basically states we can expect the key rate going higher if new risks materialize,” Sebastien de Prinsac, director for fixed-income sales at OAO Gazprombank in Moscow, said in e-mailed comments.

Russia is rated Baa1 at Moody’s, its third-lowest investment grade, and BBB by Fitch, its second-lowest investment ranking. Standard & Poor’s downgraded Russia to BBB-, its lowest non-junk score, on April 25.

New Risks

“The move will also likely have a negative impact on the economy and could push Fitch and Moody’s toward a negative rating action later today,” Vladimir Osakovskiy, chief economist for Russia at Bank of America in Moscow, said in e-mailed comments.

The ruble was little changed at 47.1695 against the euro and weakened less than 0.1 percent versus the central bank’s target basket of dollars and euros to 40.5313.

“The rate hike may protect the ruble from a stronger sell-off,” Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow, said in e-mailed comments. “It was expensive to make short-term bets against the ruble before the hike, now it will be even more expensive.”

The currency depreciated 6.4 percent against the dollar this year, the worst performance among 14 developing-market currencies in Europe.

European Union countries are still working on possible third-round economic sanctions against Russian officials and companies for their alleged participation in aggression against Ukraine. Some EU states still oppose further sanctions, Polish Prime Minister Donald Tusk told reporters in Warsaw.

“We see today’s rate hike as partly a pre-emptive measure to support demand for ruble assets in the event that sanctions trigger further outflows,” Morgan Stanley analysts Jacob Nell and Alina Slyusarchuk said in an e-mailed note. “And partly as a measure to demonstrate the strong commitment to the 4 percent medium-term inflation target.”

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