Russia Hedges Against Fed Surprise With Frontloaded Auctions

  • Completes third-quarter borrowing a week ahead of schedule
  • Weekly fund-raising next week will be replaced by bond swap

Russia is taking no chances that the Federal Reserve will derail its fundraising plan.

The nation’s finance ministry exhausted its quarterly borrowing target on Wednesday and replaced a regular auction next with a buyback. By raising the remaining 18.1 billion rubles ($280 million) hours before the Fed announces its interest-rate decision, Russia is hedging itself against the chance of a surprise hike, according to Gazprombank JSC and Raiffeisenbank JSC.

“They need to seize the moment,” said Alexey Demkin, an analyst at Gazprombank in Moscow. “The placement will happen before the results of the Fed meeting and fresh statements from its officials. How will the markets react to this? It’s best not to ponder, but to act.”

While the odds for a U.S. tightening on Wednesday are just 22 percent, two Fed primary dealers said this week markets are underestimating the chances of an earlier liftoff that would damp the appeal of higher-yielding assets in emerging markets like Russia. The government in Moscow, seeking to finance its biggest deficit in half a decade, saw borrowing costs jump after the Bank of Russia on Friday said it was taking easing off the table for the rest of 2016.

“Perhaps they are going with this amount as a protective measure to fulfill the whole quarterly plan, just in case the Fed suddenly raises the interest rate,” said Denis Poryvay, a fixed-income analyst at Raiffeisen in Moscow.

Auction Blowout

Instead of a regular auction next week, the Finance Ministry will offer to swap as much as 200 billion rubles of sinkable OFZ bonds, it said in a website statement today.

On Wednesday, it sold all 12 billion rubles of floating-rate debt due in January 2025 and 6.1 billion rubles of fixed-coupon bonds maturing in September 2031. Bets that the Fed will refrain from tightening and a rally in the price of oil, Russia’s biggest export, brought the selloff in OFZs to a halt today. Yields on 10-year notes fell 14 basis points to 8.16 percent, retracing much of their 18 basis-point increase between Friday and Tuesday.

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