Russian Bonds Slide as Second Junk Rating Upends Ruble RallyVladimir Kuznetsov and Ksenia Galouchko
Russian borrowing costs surged the most in more than a month and the ruble weakened on concern the nation’s second junk rating this year will force some investors to sell sovereign bonds.
The yield on local-currency government bonds jumped the most since Jan. 13 in the first trading day for domestic securities since Moody’s Investors Service cut Russia to Ba1 on Friday. The ruble lost 1.5 percent against the dollar, paring the biggest gain in emerging markets this month, while banks led declines in the benchmark Micex Index.
The downgrade by Moody’s, which cited the conflict over Ukraine and an oil-price slump in its decision, followed a similar cut by Standard & Poor’s last month. The junk ratings risk triggering as much as $4.5 billion of outflows from Russian foreign-currency debt by bond funds that track Barclays Plc indexes, Barclays analysts said in an e-mailed note on Tuesday.
“The most negative effect of the Moody’s downgrade is that it’ll make refinancing for Russian companies more expensive and will hurt lenders as companies turn to them for loans,” Sabina Mukhamedzhanova, a money manager at Promsvyaz Asset Management in Moscow, said by phone. “The Russian market has had a significant rally and investors are taking profits.”
The ruble declined to 63.0200 per dollar by 4:16 p.m. in Moscow, trimming its advance in February to 10 percent. The currency pared losses of as much as 3.3 percent after oil, Russia’s main export earner, increased 1.2 percent to $59.60 a barrel in London.
The latest cut to junk comes amid a rally that handed Russian bond investors the biggest returns in emerging markets this month, spurred by oil’s rebound from a six-year low and a cease-fire agreement signed to end fighting in eastern Ukraine.
Five-year Russian government bonds tumbled, raising the yield 87 basis points to 13.75 percent, the highest in almost two weeks. The Finance Ministry will offer 10 billion rubles ($159 million) of Jan. 2020 bonds with a floating coupon on Wednesday after selling the entire amount tendered at auction last week.
Russian foreign bonds are now rated junk at Moody’s and S&P, while the local securities are below investment grade only at Moody’s. Should Fitch downgrade both Russia’s external and local debt to junk, a further $1 billion to $1.5 billion of outflows could be triggered by funds tracking the Barclays Global Aggregate Index, the bank said. The measure’s exposure to Russia is $133 billion, or 0.31 percent.
The cost of protecting Russian bonds against default using credit-default swaps climbed three basis points to 514 after jumping 15 basis points on Monday. Russia’s March 2030 Eurobonds fell for a fourth day, sending the yield up six basis points to 6.01 percent.
The ruble-denominated Micex Index fell 1.4 percent to 1,768.17, paring this year’s gain to 27 percent. VTB Group, Russia’s second-biggest lender, retreated 3.5 percent to the lowest in almost a month.
Moody’s cited the prospect of further U.S. and European Union sanctions over Russia’s alleged role in the Ukraine conflict as well as the “erosion” of the country’s foreign reserves, which policy makers ate into last year as the central bank struggled to slow the ruble’s 46 percent slump.
“While the fall in the oil price and the exchange rate have reversed somewhat since the start of the year, the impact on inflation, confidence and growth is likely to be sustained,” Moody’s said.