Russia Bond Rally Slows on Oil as BofA Call Signals Rate Cutsby
Ruble weakness won't derail further easing, BofA says
October rally pushed yields to 11-month low at start of week
Russian government bonds dropped from an 11-month high as crude oil retreated, dragging the ruble down, while Bank of America Corp. and Danske Bank A/S said the ruble’s weakness won’t discourage the central bank from resuming interest-rate cuts.
Bond yields have fallen in October on bets the currency’s recovery this month paves the way for a resumption of monetary easing. Policy makers may cut rates 50 basis points at a meeting next week and by a further half point in December, Bank of America analysts led by David Hauner said in an e-mailed note on Wednesday.
To take advantage of future cuts, Hauner recommended using the one-year cross-currency swap, which he predicted will fall to 8.4 percent by the end of the first quarter next year from 10.975 percent now. Yields on 10-year bonds rose four basis points, trimming this month’s decrease to 89 percentage point. Brent oil, Russia’s main export earner, has fallen 5.1 percent so far this week.
The ruble is “still strong enough for the Bank of Russia to contemplate another cut this year,” Vladimir Miklashevsky, a strategist at Danske Bank in Helsinki, said by e-mail. The currency is “mostly pressured by oil," he said.
The ruble weakened 1.5 percent to 63.0480 per dollar as of 5:06 p.m. in Moscow, headed for the lowest level in a week and the second-worst performance in emerging markets after the South African rand.
"Ruble weakness would delay but not abolish the disinflation and rate-cutting trend," the Bank of America analysts said.
The Finance Ministry sold almost 70 percent out of 25 billion rubles ($396 million) in bonds it offered, failing to sell out auctions for the first time in four weeks. It sold all 12.5 billion rubles of fixed-rate May 2020 bonds and 4.92 billion rubles of December 2017 floaters.
"I don’t think this means the end to the bond rally," Konstantin Artemov, a money manager of bond portfolios at Raiffeisen Capital asset management company in Moscow, said. "It’s just that people are fed up with floaters."