Russian Bonds Recover Pre-Sanctions Levels as Oil Drives Flows

  • Stocks and the ruble also climb as Brent gains for third day
  • Ruble offers second-best carry trade in emerging markets

Russian bonds rallied, pushing yields to the lowest level since before the imposition of international sanctions, as the rebound in oil prices boosted the economic prospects for the world’s biggest energy exporter.

The yield on local currency government notes known as OFZs due in 10 years declined by three basis points to 8.85 percent, the lowest since July 16, 2014, when the U.S. barred some of Russia’s biggest companies from foreign capital markets over the country’s alleged role stoking the conflict in eastern Ukraine.

The rebound in crude prices, as producers whittle down a supply overhang, is luring international investors back to Russia. At the same time, the Finance Ministry has uncorked one of its sovereign wealth funds to help cover the budget deficit, flooding the banking system with cash and creating additional domestic demand among banks for the relative safety of government-issued assets.

"OFZs may keep going," said Luis Costa, a London-based strategist at Citigroup Inc. whose recommendations include four-year bonds.

‘Huge Boost’

The ruble traded little changed at 64.9830 against the dollar by 5:25 p.m. in Moscow, following the biggest gains in emerging markets yesterday. The currency has advanced 21 percent in the past three months, the best performance among the world’s major currencies. The Micex index of major stocks climbed less than 0.1 percent to 1,911.

"The performance in oil is obviously giving it a huge boost," said Costa, who advises "long" positions in the currency.

Appetite for Russian debt is also being supported by the central bank’s reluctance to cut interest rates until inflation shows clearer signs of deceleration, Costa said. That’s luring carry traders to some of the “tightest monetary conditions" in emerging countries as the Bank of Russia holds its benchmark at 11 percent, he said.

In a so-called carry trade, investors borrow in a currency where interest rates are low and use the cash to purchase high-yielding securities. Carry traders have earned 17 percent investing in the ruble this year, the most after Brazil’s real among emerging-market currencies tracked by Bloomberg.

Before it's here, it's on the Bloomberg Terminal.