Russia Bonds Climb Most in Developing Europe on Rate-Cut Bets

  • Five-year government debt advances for a second day with ruble
  • National Asset Management sees entry point after selloff

Russian bonds advanced the most in emerging Europe and the ruble gained with oil as investors piled into local debt on bets the central bank will continue monetary easing.

Local government bonds rose for a second day, with yields on five-year debt falling 11 basis points to 8.74 percent by 6:40 p.m. in Moscow. Forward-rate agreements rose on Tuesday, with data showing derivatives traders are predicting 58 basis points of reductions to the central bank’s base rate, now at 10.5 percent, over the next three months.

Russian government bonds known as OFZs have offered investors a return of 23 percent in dollar terms in 2016, the second-best performance after Brazil, as the inflation rate has fallen to a two-low. The rally was upset last week as yields rose the most since January after the U.K. vote to leave the European Union and a plunge in oil prices, providing a cheaper entry point, according to Andres Vallejo, an investor at National Asset Management Co. JSC in Moscow.

“After last week’s selloff in OFZs, it makes sense to buy now,” Vallejo said. He expects yields to fall a further 35 basis points to as low as 8.4 percent. “Global appetite for risky assets has improved and it looks like British authorities have been able to manage the chaos over Brexit. Even if the central bank takes a pause in its rate cuts in July, it’ll resume them in September."

Data showing a surge in U.S. hirings and bets that policy makers may boost stimulus following the U.K.’s vote on the EU have fueled a recovery in emerging-market assets. This optimism, along with slowing inflation, have spurred bets policy makers will push on with rate cuts as soon as at their next meeting on July 29.

The ruble gained 0.4 percent to 63.93 against the dollar as Brent crude rose 4 percent to $48.15 a barrel.

The central bank may cut the benchmark rate to 6.8 percent by the end of 2017 as inflation slows over the next year, Citigroup Inc. said in an e-mailed report on Tuesday. Annual inflation in Russia rose to 7.5 percent in June from 7.3 percent in the previous month, the first uptick since August, while still remaining near a two-year low, data showed last week.

“The key impediment to easing policy is the discrepancy between fast-decelerating inflation and still elevated inflationary expectations,” Citigroup economist Ivan Tchakarov said.

Russia’s Finance Ministry plans to auction 25 billion rubles of bonds on Wednesday, including 15 billion rubles of fixed-rate notes due September 2031 and 10 billion rubles of January 2020 floaters.

The Micex Index of stocks added 1.5 percent to 1,942, led by oil producer Rosneft PJSC and Sberbank PJSC.

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