Russian Linker Auction Sells Out as Negative Real Yields Persist

  • Yields on five-year bonds less than zero adjusted for CPI
  • Inflation linkers seen offering protection against ruble, oil

Will Russia Cut Rates as Inflation Slows?

Investors’ demand for inflation-linked bonds exceeded the amount sold by almost five times as the ruble trading near a week low and negative real yields boosted appetite for bonds that protect against a pickup in inflation.

The Finance Ministry today sold all 20.2 billion rubles ($320 million) of inflation-linked securities due August 2023 paying interest of 2.5 percent. Russian consumer prices rose 15.7 percent in September, staying at or above 15 percent for a ninth month. That leaves the yield on five-year government notes below zero when adjusted for inflation.

“The instrument looks attractive,” Yulia Safarbakova, senior fixed-income analyst at BCS Financial Group in Moscow, said in e-mailed comments. “The high demand isn’t surprising amid the lack of clarity surrounding inflation. Investors offered a respectable premium to the market in order to get this bond.”

Demand of 92.6 billion rubles at the auction was almost five times the amount sold, the Finance Ministry said on its website. That’s the highest bid-to-cover ratio at a government bond auction in almost two months.

The ruble weakened as much as 0.4 percent, before worse-than-forecast U.S. retail sales data bolstered the case for the Federal Reserve to keep rates lower for longer, increasing demand for riskier assets. The ruble was 0.3 percent stronger at 62.8520 versus the dollar by 5:54 p.m. in London. The yield on five-year government fell eight basis points to 10.61 percent.

Russian inflation rate declined in September

The government sold the bonds at an average face value of 95.7 percent. Russia in July raised 75 billion rubles from the inflation-linked securities at 91 percent of par value.

The Finance Ministry will take advantage of the rising value of inflation linkers and sell the remaining 75 billion rubles of bonds in several small amounts this year, Andrey Solovyev, global head of debt capital markets at VTB Capital in Moscow, said in an interview on Tuesday.

The Micex Index climbed 0.1 percent. Aeroflot PJSC jumped 5.6 percent. Russia’s biggest carrier is seeking to bring in 34 planes from Transaero Airlines -- including 20 for long-haul flights -- after refusing to buy the smaller, debt-burdened competitor, Chief Executive Officer Vitaly Savelyev said in an interview on Rossiya 24 television. The carrier is still in talks with leasing companies about prices, he said.

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