Russia Bonds Gain as 10-Year Yields Set for Best Week Since 2009

Russian government bonds rose for the fifth day, with 10-year yields set for the best week in almost five years, on speculation President Vladimir Putin will take steps to de-escalate the conflict in Ukraine.

The yield on 10-year local-currency securities, known as OFZ bonds, declined eight basis points to 9.25 percent, taking this week’s decrease to 65 basis points, the most since November 2009. The ruble strengthened 0.3 percent to 35.9445 per dollar at 4:22 p.m. in Moscow, set for a 0.5 percent weekly advance.

Russian markets rebounded this week as Putin pledged yesterday to work to halt the conflict in Ukraine in comments made during a visit to the Crimean peninsula that he annexed in March. Bonds are set to end a six-week rout partly triggered by U.S. and European Union sanctions that threaten to exacerbate the economy’s worst performance since the 2009 recession. Russia proposed a cease-fire to allow humanitarian aid deliveries to southeastern Ukraine.

“The recent rally in Russian debt is a reminder, if one were needed, that markets continue to give Putin the benefit of the doubt and are hanging on his every word,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said in e-mailed comments. “Putin has been able to lift sentiment by his words alone even though the crisis in Ukraine has escalated dramatically of late.”

Brent crude, which fell to the lowest level since June 2013 yesterday, headed for a 2.3 percent weekly drop. Oil and natural gas comprise 50 percent of Russia’s budget revenue.

Tax Season

The convoy of aid trucks, which the leadership in Moscow says is carrying emergency supplies, has stoked tension with Ukraine and prompted the U.S. and EU to warn Russia against using aid as a pretext for a military intervention.

Russia continues to supply rebels in the east with equipment and military vehicles from the country crossed over the border into Ukraine under the cover of darkness, Ukraine’s Defense Ministry spokesman Leonid Matyukhin said by phone.

This week’s increase trimmed the ruble’s drop in 2014 to 8.6 percent, the most among 24 developing countries after Argentina and Chile. Russia’s currency fell 0.2 percent to 48.1550 per euro and traded little changed at 41.4516 versus the central bank’s target basket of dollars and euros.

Companies, including exporters that generate revenue in foreign currencies, will pay about 965 billion rubles ($27 billion) in taxes in the two weeks starting today, according to median estimate of five analysts surveyed by Bloomberg, potentially boosting demand for the local currency.

Higher Rates

Russia’s central bank has raised its key interest rate by 2.5 percentage points this year to 8 percent, including a 50 basis-point increase last month, to curtail inflation and support financial markets. The 10-year bond premium over the key rate declined to 133 basis points yesterday, after climbing to 190 basis points last week, the widest since May.

Annual price increases were unchanged for the third straight week at 7.4 percent in seven days to Aug. 11, with the country’s food-import ban announced in retaliation for sanctions having a negligible effect on prices so far, according to VTB Capital analysts.

“We expect the inflation to accelerate because of Russia’s import food ban, and the risks for a further interest rate hike in September are quite high,” Dmitriy Gritskevich, an analyst at OAO Promsvyazbank in Moscow, said by e-mail.

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