Citigroup Sees Russia Bonds Out of Juice as Fed Interrupts Rally

  • Consumer prices top Nabiullina agenda even as growth sputters
  • Citigroup sees Russian bond rally stalling amid Fed rate risk

Janet Yellen is casting a shadow over Russian policy makers’ interest-rate plans and prospects for the world’s best bond rally.

Citigroup Inc. analysts trimmed their 2015 forecast for Russian interest rate cuts after the central bank unexpectedly kept the benchmark unchanged for the second straight month on Friday. Ruble bonds, which fell following the decision, suffered their first decline in 10 weeks as Governor Elvira Nabiullina’s pledge to resume an easing cycle should inflation continue to moderate wasn’t enough to spur a market recovery.

The question is how much, or even whether, the Bank of Russia policy makers will cut when they next meet in December, five days before Federal Reserve Chair Yellen presides over a meeting that may result in the first U.S. rate increase in nine years. That will probably put the brakes on Russian bond returns -- which were 30 percent as of Oct. 29 -- until sometime next year, said Ivan Tchakarov, Citigroup’s Moscow-based economist.

“I don’t see a lot of juice left in the bonds for this year," Tchakarov said by e-mail Friday. The cuts were “already priced” in, he said.

Rally Stalls

Russian bonds had their first weekly decline since Aug. 21 last week, with the yield on five-year notes climbing five basis points to 10.14 percent. The rate fell two basis points by 6:30 p.m. in Moscow. In their statement Friday, policy makers acknowledged the need to stimulate a recession-addled economy, saying they’re prepared to ease when there are signs inflation is slowing from its current 15.7 percent, almost four times their target.

"The Bank of Russia may have missed a window of opportunity for easing,” Tatiana Orlova, the chief Russia economist for Royal Bank of Scotland Group Plc in London, said by e-mail. “With two global monetary policy events of paramount importance scheduled for December -- the ECB and Fed -- market volatility may rise again and prevent the central bank from easing at the next meeting as well." 

Russia will next meet on Dec. 11 to decide on interest rates. Last week, Fed officials said they’ll determine whether it would be appropriate to raise rates at their next meeting Dec. 16.

Fed Spectre

Citigroup’s Tchakarov now forecasts Russian interest rates will end the year at 10.5 percent instead of 10 percent, and predicted more aggressive easing in 2016, of 300 basis points.

In a note to clients following the meeting Friday, Bank of America Corp. reiterated its forecast of a reduction in Russian policy rates to 10 percent by year-end and to 8.5 percent by the of the first quarter. At the same time, the Fed meeting could prompt the easing cycle to be “postponed to early 2016,” according to the report by by Vladimir Osakovskiy, Russia & CIS economist at Bank of America in Moscow. 

Russian ruble bonds will earn at least 10 percent next year, after leading the world in 2015, Bank of America said last week.

“The Russian rates story is a long term theme, and while we expected a cut on Friday, a prudent delay is even long-term positive,” David Hauner, a London-based strategist at Bank of America, said in an e-mail on Monday.

The Bank of Russia may wait until next year to resume rate cuts unless there’s a "strong" market rally, on concern about the global market reaction to the Fed, according to TD Securities. Forward-rate agreements Monday showed traders pared bets on rate cuts to 55 basis points in three months, down from 70 on Thursday.

“Before deciding whether to cut rates, the Bank of Russia may need to improve its confidence that a Fed hike can be absorbed without markets shunning emerging-market assets,” Cristian Maggio, head of emerging-markets strategy at TD Securities in London, said in an e-mailed note.

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