Russia Bonds Fall With Emerging-Market Peers as Traders Eye Fed

  • ‘Hot money’ to leave Russia if Fed moves to tighten: NAM
  • Government bond yields rise 13 basis points in two days

Russian government bonds declined for a second day as concern the Federal Reserve may increase U.S. interest rates hurt sentiment for riskier assets.

The yield on five-year bonds rose two basis points to 8.34 percent by 7:12 p.m. in Moscow for a two-day gain of 12 basis points, the biggest since July. Yields on 10-year notes rose two basis points to 8.1 percent. The ruble reversed earlier losses as Brent crude rallied following a 4 percent decline on Friday.

Developing-nation markets headed for the biggest back-to-back drop since June on wagers the U.S. central bank is leaning toward tightening the monetary stimulus by the end of the year. Investors will be watching Fed Governor Lael Brainard on Monday for clues on future action after Boston Fed President Eric Rosengren said on Friday the economy could overheat should policy makers wait too long to hike rates.

“All eyes are on the Fed’s rate signals because if the Fed decides to hike in December, this will completely change the attitude toward Russian assets and hot money will leave," Andres Vallejo, an investor at National Asset Management Co. JSC in Moscow, said by phone. Vallejo sees Russian long bonds as overvalued and recommends staying in short-term OFZs and Eurobonds.

Bets for an increase in U.S. borrowing costs in December pared to 58 percent from 60 percent earlier on Monday.

As the Bank of Russia meets Friday to decide on its key rate, 26 out of 29 analysts forecast the central bank will reduce the key rate by 50 basis points to 10.5 percent.

“If the Fed signals a rate increase, then even the Bank of Russia’s rate cuts won’t outweigh the flight from Russian bonds,” Vallejo said.

The currency of the world’s biggest energy exporter erased earlier losses, rising 0.2 percent to 64.6725 per dollar. Oil climbed 0.9 percent to $48.45 per barrel after plummeting 4 percent on Friday.

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