Ruble Bonds Rally as Bank of Russia Touts Inflation Slowdown

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Russia’s ruble bonds climbed to the highest in seven months after comments by a central banker stoked investor confidence policy makers will push ahead with interest-rate cuts.

Government notes due February 2027 climbed for a third day, reducing the yield seven basis points to 10.28 percent, the lowest since Nov. 25. Annual inflation in Russia is slowing “very quickly” and the rate will fall from 16.4 percent in April to near 12 percent by year-end, First Bank of Russia Deputy Governor Ksenia Yudaeva said in Astana on Thursday

The ruble’s 22 percent rebound this year led to the first price-growth slowdown in nine months in April as a cease-fire in Ukraine mostly held and the price of oil, Russia’s key export earner, recovered from six-year lows. The deceleration is making it easier for the central bank to fight an economic contraction by continuing to unwind last year’s string of emergency rate increases as the economy contracts.

“There are several factors rolled together -- the central bank is talking about lower inflation expectations, of slower inflation,” Olga Sterina, an analyst at UralSib Capital in Moscow, said in e-mailed comments. “It’s a good signal to the market that the rates will be cut.”

The key rate has already been reduced to 12.5 percent from 17 at the beginning of the year and derivatives traders are pricing in 86 basis points of cuts in the next three months. Five-year government bonds are trading at a 10.61 percent yield, or 189 basis points below the key rate, the widest spread in more than two weeks.

That may signal the bond rally will peter out, according to Alexey Tretyakov, a money manager at Aricapital Asset Management in Moscow.

Bond Limit

“The OFZs are trading close to 10 percent yield, which I think is their limit,” Tretyakov said in e-mailed comments. “Perhaps buyers believe in a much stronger deceleration of inflation, close to the central bank’s target level of 4 percent to 5 percent, but I think it’s unrealistic.”

The ruble strengthened 0.1 percent against the dollar to 49.9260 by 6:34 p.m. in Moscow and set for a 0.8 percent decline in the week.

The ruble’s losses this week were fueled by statements this month from the finance ministry and central bank, who said they have started buying foreign exchange. While the currency’s gains damp inflationary pressures, they also threaten to curb Russia’s export earnings in local-currency terms.

The Micex Index of stocks rose 0.4 percent to 1,665.66, paring its weekly decline to 1.5 percent.