Russia Bulks Up for Bond Splurge by Doubling Year-End Target

  • Ministry will offer as much 40 billion rubles of OFZs a week
  • Raiffeisenbank sees plan spurring longer yields by 25-50bps

Russia will double the size of weekly bond auctions through the end of the year as it prepares a fourfold borrowing increase in 2017 to plug the widest budget deficit in more than half a decade.

The net fundraising goal this year will be increased by as much as 200 billion rubles ($3.16 billion) to 500 billion rubles, Russia’s Finance Minister Anton Siluanov said on Friday. In 39 weeks this year Russia has raised 758 billion rubles on the domestic market, or about 19 billion rubles per week, Finance Ministry data show.

"This will allow us to reach the level of borrowing we plan for the next year," Siluanov told reporters in the Black Sea resort town of Sochi. "Until the end of the year we’ll be borrowing 30 billion to 40 billion rubles per week."

Siluanov is basing next year’s budget on a conservative price of $40 per barrel of crude and his ministry will aim to patch the shortfall with a drastic increase in borrowing, targeting over 1 trillion rubles in net sales of OFZ ruble bonds. While the extra supply of debt to the market may push down prices, there’s scope for local and overseas investors to mitigate the impact: foreign ownership of the government’s ruble bonds is at one of the lowest levels in emerging markets, according to Morgan Stanley analyst Min Dai.

Russia’s 10-year bond yields tumbled to the lowest in 2 1/2 years on Sept. 8 as investors searched for returns in emerging markets in a world of record-low interest rates. The yield has climbed 26 basis points since then, trimming the drop in the quarter to 12 basis points.

The increase in fourth quarter borrowing will put a cap on bond prices and the extra sales could lift yields on long-maturity debt by 25 to 50 basis points, Raiffeisenbank JSC analysts wrote in a research note on Friday.