Russian Rate Cut Called Science Fiction as Bonds Erase 2015 Gainby
Defense of ruble looms larger for policymakers than stimulus
GAM's McNamara cutting exposure to OFZs as oil adds to doubts
Russia’s whipsawing currency has sunk any chance central bank chief Elvira Nabiullina had of cutting rates this week and gives investors another reason to sell government bonds, the worst performers in the developing world this year.
After the ruble blew through its previous record low of December 2014 last week, money managers are betting the Bank of Russia won’t help the recession-wracked economy by lowering borrowing costs when it meets on Friday. The median estimate of 30 economists surveyed by Bloomberg this month calls for Nabiullina to leave the rate at 11 percent, where it’s been since August.
"A rate cut in January is science fiction,” Alexey Tretyakov, money manager at Aricapital in Moscow, said Friday.
Back in December, Bank of America analysts predicted a combination of policy easing and slower inflation would generate another year of double-digit returns for government bonds. Instead, the ruble’s collapse has meant the so-called OFZs have handed investors a 16 percent loss in dollar terms as of Jan. 21, erasing 2015’s gain of 12 percent.
“A weaker ruble pushes out rate cuts,” said Paul McNamara, a money manager who helps oversee $4.3 billion of assets at GAM UK in London. He’s not expecting rates to be lowered and has cut back his exposure to government debt to neutral compared with an overweight position last month.
The ruble weakened 2 percent to 79.600 per dollar by 2:08 p.m. in Moscow on Monday. The yield on five-year government bonds was unchanged at 10.66 percent.
After collapsing as much as 5.3 percent to a record intraday low of 85.999 per dollar on Jan. 21, the currency rallied as much as 6.1 percent on Friday after oil climbed and Nabiullina said she stands ready to rein in ruble volatility. The repercussions of China’s economic slowdown have rattled Russia this year as oil slumped to $27 per barrel earlier in the week.
“If you get oil wrong, you’ll lose money in OFZs,” McNamara said. “We don’t see an argument for much lower oil prices, so we’re holding an index-weight allocation to OFZs.”
For other investors, government bonds have fallen far enough to buy. At a press briefing following their last rate last meeting on Dec. 11, policy makers said cuts will resume in the next three meetings if the inflation outlook permits.
“I still think they will still start to cut them,” said Dmitry Kosmodemiyanskiy, money manager at Otkritie Asset Management Ltd. in Moscow. “Not now, of course, but in the second quarter they will. That’s why I buy OFZs on dips."
Tretyakov at Aricapital said he boosted his holdings of inflation-linked notes this month because they offer good value relative to debt denominated in foreign currency and compensate for inflation risks. The firm manages 700 million rubles ($9 million).
The median forecast of economists surveyed by Bloomberg calls for the Bank of Russia to cut rates 250 basis points this year to 8.5 percent by the fourth quarter and for inflation to slow to 7.5 percent, bringing it close to the regulator’s target of 4 percent by 2017. The consumer price index slowed for a fourth month in December to 12.9 percent.
Policy makers are likely to keep rates on hold when they meet, Economy Minister Alexei Ulyukayev told reporters Monday.
At current oil prices, the Bank of Russia is more likely to entertain a rate increase than a cut, said Oleg Kouzmin, an economist at Renaissance Capital, who previously worked at the central bank. Derivatives data also suggest an increase is possible: forward rate agreements were signaling a 20 basis-point hike in the next three months on Friday, compared with cuts of as much as 72 basis points in December.
“Oil prices staying closer to $30 a barrel would leave no room for rate cuts this year, and could potentially force the central bank to hike rates at some point,” Kouzmin said.