Russia Bonds Drop as Ruble Rout Seen Reducing Rate-Cut Prospects

  • Russian currency weakens 2nd day as oil prices tumble
  • Bank of Russia warned it may raise rates on inflation risks

Russian government bonds retreated for a third day as oil’s renewed drop weakened the ruble the most among emerging-market currencies, spurring speculation the central bank will delay a return to a rate-cutting cycle to avoid stoking inflation.

Yields on the government’s five-year securities rose 14 basis points to a week-high of 10.55 percent. The rate has risen 31 basis points since Jan. 29, when the Bank of Russia removed a reference to resuming an easing cycle, saying instead it would consider hoisting borrowing costs if inflationary pressures worsen. The ruble fell 2.2 percent to 79.05 per dollar by 4:15 p.m. in Moscow.

“A more hawkish stance on interest rates” has combined with weakening oil prices to hurt appetite for local debt, said Olga Sterina, an analyst at UralSib Capital in Moscow, who recommends investors buy Russian inflation-linked notes to protect against a possible acceleration in price growth. “It’s clear now that the rates will not decline as fast as markets have been expecting.”

The central bank’s shift in tone after last week’s rate-setting meeting signaled consumer-price increases may start climbing again as the ruble’s 6 percent depreciation this year threatens to push up the cost of imports. Inflation slowed to a one-year low of 12.9 percent in December. The prospect for a return to rate cuts for the first time since July was a key catalyst behind a local-bond rally that handed investors returns of 12 percent last year, the third-biggest among emerging markets in a Bloomberg bond index.

Smaller Cuts

Analysts have been trimming back their forecasts for how much policy makers will lower benchmark borrowing costs, currently at 11 percent. Those surveyed by Bloomberg see the rate falling to 9.05 percent by year-end, compared with 8.75 percent at the end of last year. While they struggle with above-target inflation, policy makers also want to ease policy to bolster an economy caught in recession.

The impact of the weaker currency on inflation is stronger in Russia than other countries in the region because of the high level of imported goods in the domestic economy, Citigroup Inc.’s CEEMEA strategist Luis Costa said in e-mailed comments.

Hawkish Path

"That may continue to set the CBR governor Nabiullina on a hawkish path over the next quarter or so," he said.

As bonds and the ruble fell on Tuesday, the 50-member Micex Index declined 0.8 percent to 1,759.47. The price of a barrel of Brent crude in local-currency terms declined 1.7 percent to 2,603 per barrel.

The Finance Ministry will offer 12.1 billion rubles ($152 million) of inflation-linked bonds due August 2023 and 15 billion rubles of fixed-coupon bonds due August 2021, according to a statement on its website.

The central bank’s change in tone means “we shouldn’t count on a rate cut in Russia this year,” said Leonid Ignatyev, an analyst at BCS Financial Group in Moscow. “You’ll be hard pushed to make any money on ruble bonds.”

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