Russian Bonds Drop as Oil Clouds Best Emerging Currency Rally

Russian bonds and the ruble fell as declining oil prices showed the downside risks to this quarter’s biggest rally in both assets among emerging markets.

Yields on five-year government notes climbed 38 basis points to 12.46 percent on Tuesday, paring the drop in borrowing costs for the three-month period to 2.95 percentage points. Central bank interest-rate cuts supported bonds, while Brent crude’s stabilization around six-year lows and a cease-fire in eastern Ukraine buttressed the ruble’s 4.4 percent advance against the dollar since Dec. 31.

The sustainability of the gains is in question with Brent, the benchmark used to price Russia’s main export blend, capping its third quarterly retreat as Iran and world powers worked toward a nuclear deal that may lead to the OPEC member increasing crude exports. While expectations for future price swings in the ruble have fallen by more than half in 2015, they’re still above any other currency tracked by Bloomberg worldwide.

“The oil price remains a big risk that one cannot ignore,” Tom Levinson, a foreign-currency and interest-rate strategist at Sberbank CIB in Moscow, said by e-mail. “Russian markets are establishing something of a steady state or new normal.”

The ruble weakened 1.2 percent to 58.19 per dollar by 5:12 p.m. in London. Carry traders who borrowed in dollars to fund purchases of ruble debt in the last three months earned 8.7 percent, exceeding returns for the second-best currency, the Indian rupee, by more than three times.

Local Fundraising

As Russia’s borrowing costs fell, the Finance Ministry returned to the local debt market to raise funds amid projections that the budget deficit will swell to 2.2 percent of gross domestic product in this year, the most since 2010.

The ministry, which announced plans to sell 20 billion rubles ($344 million) OFZ bonds on Wednesday, raised 103 billion rubles in the first quarter, two thirds the amount issued for all of 2014.

Foreign investors helped drive purchases of OFZs this year, and data will probably show “a speculative capital inflow” in February and March, according to Ivan Guminov, a money manager at Ronin Trust in Moscow.

Bonds climbed this year as the central bank cut benchmark interest rates by 300 basis points to 14 percent in two moves, partly unwinding 11.5 percentage points of increases in 2014 to stem the ruble’s rout. Higher borrowing costs have exacerbated the nation’s economic slump, helping prompt analysts to forecast the nation’s first recession in six years in 2015.

Russia’s dollar-denominated RTS Index of equities advanced 11 percent in the first quarter, the best performance since the three months ended June 30.

The number of stocks on the benchmark Micex Index that are trading above their 50-day moving average was 17 on March 30 from as many as 49 of the 50 stocks in mid-February. OAO Gazprom, the nation’s natural-gas export monopoly, climbed 6.6 percent in the three-month period.

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