Russian Bonds Advance as Central Bank Seen Keeping Carry Intact

  • Yields on 10-year debt have fallen 20bps in past five sessions
  • Economists see Bank of Russia keeping rate at 10% this week

Russian government bonds gained and the ruble advanced for a second day as investors predicted the central bank will keep rates unchanged this week, fueling demand for one of the highest yields among emerging markets.

The rate on 10-year bonds, known as OFZs, dropped one basis point to 8.35 percent, bringing the decline over the last five sessions to 19 basis points. The ruble is also getting support from local tax payments, and the currency strengthened 0.2 percent to 62.23 per dollar, even as oil prices erased gains.

Bank of Russia will probably leave its benchmark rate at 10 percent when it meets at the end of the week to discuss monetary policy, in line with Governor Elvira Nabiullina’s pledge to hold off on rate cuts until next year. That’s making ruble assets appealing as a so-called carry trade, in which investors borrow where rates are low and invest in higher yielding securities. Hedge funds and other large speculators increased net ruble long positions by 81 percent to an all-time high in the week ended Oct. 18, U.S. Commodity Futures Trading Commission data show.

"The carry trade is pushing both the ruble and the OFZs higher as the European Central Bank remains on the easing side and the Fed doesn’t sound hawkish," Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said by e-mail. At the same time, Losev sees the ruble weakening 11 percent to 70 per dollar by the end of the year as the U.S. central bank moves to tighten monetary policy.

Remarks by Federal Reserve Chair Janet Yellen on Oct. 14 indicating a willingness to let the U.S. economy run hot caused Treasury yield curve to steepen that day by the most since March. Traders will focus on comments by policy makers this week for clues to the path of U.S. rates. Scheduled speakers include New York Fed President William Dudley, St. Louis Fed President James Bullard, Chicago Fed President Charles Evans and Atlanta Fed President Dennis Lockhart.

Selling dollars to buy rubles has earned investors 28 percent this year, the second-highest carry returns among emerging-market currencies, data compiled by Bloomberg show. Brent crude fell 1 percent to $51.27 per barrel. The Micex stock index rose 0.2 percent.

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