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By Bloomberg

Russia sold the most bonds in four months after a surprise central bank interest rate cut boosted demand for the nation’s debt, giving the government leeway to reject more than half the bids.

The Finance Ministry raised 7.34 billion rubles ($111 million) at the auction of December 2017 floating-rate notes, less than the 10 billion rubles it offered. This suggests investors, who submitted bids valued at 20.6 billion rubles, continue to demand a premium to buy Russian debt even after a three-day bond rally pushed yields to an eight-week low.

Government bonds and the ruble resumed declines today as oil retreated following its biggest four-day rally since 2009, refocusing investor attention on escalating tension in Ukraine as Germany suggested the European Union may slap new sanctions on Russia. Demand at the auction climbed as speculation grows the Bank of Russia will lower interest rates further to shore up an economy that’s on the brink of a recession.

“The chances are high that rates will fall,” Vladimir Evstifeev, an analyst at OAO Bank Zenit in Moscow, said by e- mail. Demand grew at the sale due to “the cut in central bank rates and oil,” he said.

Brent crude, the oil grade used to price Russia’s main export blend, declined 1.8 percent to $56.88 a barrel today, ending a four-day rally that drove the price up 19 percent. The ruble slid 1.4 percent to 66.0940 per dollar, after jumping 5 percent on Tuesday.

‘Right Moment’

The yield on five-year government bonds climbed four basis points today to 14.03 percent, trimming its decline since the Jan. 30 rate cut to 119 basis points. The Bank of Russia lowered its key rate by 200 basis points to 15 percent, having raised the rate to 17 percent in a surprise move on Dec. 16 in Moscow to shore up the ruble and tackle inflation at a 5 1/2-year high.

At Wednesday’s offering, the ministry placed the notes at an average yield of 13.89 percent. Russia took just over half of the bids placed at last week’s sale and only a fifth the week earlier. Both offerings were 5 billion rubles in size -- compared with tenders that typically ranged from 20 billion to 30 billion rubles before Putin’s incursion into Crimea in March.

“It’s a very right moment for the Finance Ministry to place bonds and increase the amount,” Yulia Safarbakova, a fixed-income analyst at BCS Financial Group in Moscow, said in e-mailed comments before the sale.

Market ‘Unconvinced’

While inflation expectations are easing, monetary policy remains tight even after the rate cut, Bank of Russia Governor Elvira Nabiullina told reporters Feb. 3. Policy makers will reduce rates again, according to 30 of 33 economists surveyed by Bloomberg, with 70 percent forecasting a reduction by the end of April.

The conflict in Ukraine, which has killed at least 5,358, has flared up in recent weeks, with rebels in the east and the Kiev government mobilizing more troops. Penalties on Russian companies and individuals and oil’s 46 percent slide in the past six months have driven the world’s largest energy exporter toward recession.

“Ruble-specific factors remain strained,” Tom Levinson, a foreign exchange and interest rates analyst at Sberbank CIB in Moscow, said in e-mailed comments before the auction. “The situation in Ukraine is deteriorating, while the market remains unconvinced by the central bank’s recent moves.”