Stone Harbor Sees Value in Bonds Crushed by Russian Rate Flight

  • Fund run by ex-Goldman strategist Sclater-Booth may add OFZs
  • Bank of Russia slant seen as `rhetoric' to thwart speculators

Foreign money managers are ignoring Elvira Nabiullina’s new incarnation as a hawk.

Aberdeen Asset Management Plc called the Bank of Russia governor’s tilt towards interest-rate increases empty words, while Stone Harbor Investment Partners LP is considering whether to add to its holdings of government bonds known as OFZs.

“We are comfortable with our positions in OFZs, as we like the duration story in Russia,” said Stuart Sclater-Booth, who helps oversee $45 billion at Stone Harbor. The New York-based money manager, formerly the head of emerging-markets strategy at Goldman Sachs Group Inc., has a bigger exposure to Russia than benchmark indexes indicate.

The central bank’s abrupt shift, from pledging easing to signaling rate increases, undercut the investment case for Russian government bonds that made them Bank of America Corp.’s top pick for 2016. January was the first month since August that yields on five-year debt rose following a rally spanning four straight months.

Not only did Nabiullina retract a pledge to continue monetary easing at her first rate meeting Jan. 29 amid a deepening selloff in oil, she acknowledged risks she may not reach a target to lower inflation to 4 percent by late 2017, from 12.9 percent in December. The central banker halted an easing cycle in September as a selloff in oil hammered the ruble and threatened to quicken the pace of consumer-price increases.

Ruble Attack

Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management in London, isn’t buying the new tightening stance and said it hasn’t changed his view on OFZs.

“Because the currency has been so weak, the central bank had to send out that kind of rhetoric just to ensure that the speculators don’t attack again,” said Gutierrez, who helps oversee about $11 billion at Aberdeen. “We are not surprised by what the central bank said, and we plan on holding on to our Russia exposure.”

Nabiullina isn’t the first central banker to telegraph policy moves ahead of time in an attempt to influence the market. Words, or forward guidance, became a tool popular with Janet Yellen and Mark Carney during the financial crisis. Whether it has worked is a question being debated, with former U.K. policy maker Adam Posen dismissing it as “cheap talk” and others saying it’s only served to obfuscate and confuse. The tactic at first helped the ruble, which strengthened 1.3 percent on Friday after the statement. Since then, however, the currency has lost 5 percent, the most in emerging markets.

Rally Reversal

Yields on five-year OFZs rose 14 basis points to a week-high of 10.55 percent as of 4:30 p.m. in Moscow.

Some money managers such as Eric Fine, a managing director of fixed income at Van Eck Associates in New York, are looking for more evidence that Russia’s economy can withstand external forces, including China’s slowdown and Federal Reserve rate increases expected to sap demand for riskier assets.

“Local-currency bonds look attractive on their own merits, however not enough to counter the headwinds,” Fine said. He prefers Eurobonds amid talk that Europe and the U.S. will ease sanctions against Russia that have all but closed foreign market to Russian borrowers since July 2014.

BoA Favorite

OFZs remain Bank of America’s top pick in emerging markets over a one-year time frame because they stand to gain as a recovery in the price of oil allows Nabiullina to resume rate cuts, said David Hauner, a strategist at Bank of America in London.

The Bank or Russia is still forecast to shave 200 basis points from borrowing costs by the end of the year, according to the median of 21 economists surveyed by Bloomberg. Two weeks ago the estimate was for 250 basis points of cuts this year.

Inflation is also seen falling to 8 percent by the fourth quarter, a trend that would prompt Stone Harbor to add to OFZ positions.

“We think the bonds offer good value, we think that the disinflation process is going to continue, and it will lead to lower rates,” Sclater-Booth said. “If we see inflation begin to decelerate, we will buy more.”

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