Russian Bonds Fall After Policy Makers Pour Cold Water on Easing

  • Ruble pares loss after S&P raises rating outlook to stable
  • Bank of Russia says its rate forecasts at odds with traders

Russian bonds headed for their biggest weekly decline in two months after the Bank of Russia said its 50 basis-point rate cut on Friday is the last of the year because any more risks rekindling inflation.

The yield on Russia’s February 2027 bonds climbed 10 basis points to 8.22 percent after policy makers dashed hopes that today’s interest-rate reduction would be the first of a series this year, extending their weekly gain to 13 basis points, the most since the period ending July 22. The ruble fell 0.3 percent against the dollar to 64.98 by 7 p.m. in Moscow, paring a loss of as much as 0.7 percent after S&P Global Ratings lifted the outlook on Russia’s junk credit rating to stable from negative.

“We’ll see a panic in OFZs now, the selloff might last a couple of weeks,” said Andres Vallejo, an investor at National Asset Management Co. JSC in Moscow. “This was basically a verbal intervention on behalf of the central bank to cool off the bond market.” Vallejo said when the yield on 2027 bonds jumps to 8.3 percent, it’ll be a good time to buy again.

The Bank of Russia reduced its benchmark to 10 percent from 10.5 percent, according to a statement on Friday. Thirty-seven of 42 economists surveyed by Bloomberg predicted the move. Policy makers said that for inflation to continue slowing, “the current value of the key rate needs to be maintained until end-2016.”

Bond Returns

The central bank’s move dashed investor enthusiasm about Russian local-currency bonds, known as OFZs, which have handed investors a 25 percent return in dollar terms this year, the best performance after Brazil and South Africa, according to a Bloomberg index.

“At present, the structure of market interest rates by maturity and survey findings indicate that, in contrast to the Bank of Russia, market players forecast a faster drop in interest rates,” according to the central bank statement.

Forward-rate agreements showed traders paring easing bets, with derivatives predicting 8 basis points of cuts in the next three months, down from 71 basis points at the start of September.

"The OFZ curve was obviously overheated,” said Ivan Guminov, a manager of bond portfolios at Ronin Trust in Moscow. “Today’s central bank decision will throw some cold water on optimists." He recommended going short on longer-duration OFZs.

Goldman Sachs Group Inc. placed its forecast for rates and its neutral bond view on hold following the rate decision, saying the central bank had been “signficiantly more explicit” than expected.

“In terms of asset prices, the decision supports our stance of being supportive on the ruble, while it challenges our neutral view on the bonds market towards a downward correction at least in parts of the curve,” Goldman Sachs analysts Clemens Grafe and Andrew Matheny said in an e-mailed note.

S&P lifted the outlook to stable from negative, maintaining its foreign-currency rating of BB+, one step short of investment grade and on par with Bulgaria and Indonesia. Moody’s Investors Service also has Russia one step below investment grade, while Fitch Ratings has the country at its lowest investment rating.

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