Russian Bonds Advance as Gazprombank Sees Scope for Rate Cuts

  • Gazprombank sees govt bonds returning 12%-19% in 2016
  • Annual inflation slows to 13.7% in the last week, ING says

Russian government bonds rose, pushing the yield to the lowest level in almost three weeks, as inflation data boosted speculation the central bank may restart interest-rate cuts next year.

The yield on five-year notes, known as OFZs, fell five basis points to 10.10 percent, heading for the lowest level since Dec. 4. The ruble reversed earlier gains to trade 0.7 percent weaker at 70.2960 against the dollar by 4:45 p.m. in Moscow. Brent crude oil climbed 0.4 percent to $37.51 per barrel.

Government bonds have returned investors 15 percent this year in dollar terms, the second-best performance among emerging issuers after Nigeria, and could continue to outperform in 2016 if the key rate declines from the current level of 11 percent, said Gazprombank JSC analysts led by Alexey Demkin. Consumer-price data released Wednesday indicates the annual inflation rate has fallen to 13.7 percent from 15 percent in November, said ING Groep NV economist Dmitry Polevoy.

"We expect the central bank to resume easing at the end of the second quarter and lower it 50 basis points in June,” Gazprombank said in a report on Thursday, predicting borrowing costs will decline to 8 percent by the end of 2016 from 11 percent now.

Local debt known as OFZ’s may hand investors another 12 to 19 percent of total ruble return in 2016, depending on the duration, the bank said.

‘Significant Deceleration’

"The latest inflation reading points toward a significant deceleration on inflation next year,” said Leonid Ignatyev, head of fixed-income research at BCS Financial Group in Moscow. Bank of Russia Governor Elvira Nabiullina signaled policy makers will resume cut interest rates at one of the next meetings in the first quarter of the year if inflation allows.

Consumer prices rose 0.6 percent in the first three weeks of December, the state statistics service said on Wednesday.

"The inflationary effect of the weaker ruble will evaporate" in the first quarter of 2016, and inflation will continue to decelerate to 8 percent by the end of the year," as long as the oil price does not fall significantly from the current level," Sberbank CIB analysts, led by Evgeny Gavrilenkov, said in a report.

The Bank of Russia has held off on lowering interest rates since July after unwinding part of the tightening introduced in 2014 to stabilize the ruble and tame inflation.

The Micex Index of shares rose 0.2 percent.

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