Russian Bonds Rise on 2016 Rate-Cut Prospect as Ruble Trims Gain

  • Monetary easing in 2015 fueled 2nd-best emerging-market rally
  • Uralsib cautions against buying OFZs due to risk of oil slump

Russian bonds gained, pushing the yield to the lowest level in three weeks, as oil prices recovered and investors bet the central bank will have room to resume interest-rate cuts in 2016. The ruble trimmed its weekly appreciation.

Yields on five-year government notes, known as OFZs, fell three basis points to 10.07 percent by 5:46 p.m. in Moscow, bringing the drop this week to eight basis points, the most since the period ended Nov. 20. The ruble, which weakened on Friday, is up 0.4 percent over five days. Brent crude, used to price Russia’s main export blend, climbed the most since October this week.

Analysts surveyed by Bloomberg are predicting Russian policy makers will lower benchmark borrowing costs from 11 percent during 2016 to help shore up an economy caught in its worst recession since 2009. Six percentage-points of rate reductions during 2015 contributed to a bond rally that handed investors 15 percent returns in dollar terms this year, the second-highest in emerging markets.

“Investors are piling into government bonds before the New Year’s holidays as oil has climbed and because they’re betting on a drop in OFZ yields in 2016 amid interest-rate cuts,” Dmitry Dudkin, the head of research at Uralsib Capital in Moscow, said by e-mail.

‘Huge Risks’

Dudkin cautioned against that strategy, saying he wasn’t recommending buying OFZs due to concern that oil may fall further and stoke inflation by exacerbating the ruble’s slide. While Brent crude rose 2.7 percent this week, it’s fallen 15 percent in December to under $38 a barrel as the Organization of Petroleum Exporting Countries effectively abandoned output limits at a meeting this month. Russia gets about 50 percent of budget revenue from oil and gas industries.

“The drop in the price of oil in December poses huge risks to the resumption of rate cuts next year," Dudkin said.

Bank of Russia Governor Elvira Nabiullina, who has kept borrowing costs on hold since July, signaled policy makers will resume monetary easing 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. On an annual basis, inflation was 15 percent in November, compared with a target of under 7 percent by October next year and 4 percent in 2017.

The Micex Index of shares declined 0.5 percent to 1,733.65 on Friday. The ruble depreciated 0.6 percent to 70.628 per dollar. Companies have until today to pay about 608 billion rubles ($8.6 billion) in taxes, according to Sberbank CIB estimates.

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