Azernews.Az

By Bloomberg

Russian bonds gained, pushing yields to the lowest in three weeks, as Goldman Sachs Group Inc. and Credit Suisse Group AG said local-currency debt didn’t reflect the outlook for interest-rate cuts.

Yields on five-year bonds known as OFZs fell 38 basis points to 13.09 percent as Credit Suisse said borrowing costs would be cut by as much as 300 basis points at a policy meeting on Friday. That’s deeper than the 100 basis-point cut projected in a Bloomberg survey. Bank of America Corp. recommended buying OFZs due in February 2019 before the decision. The ruble rose for a second day as Brent crude advanced.

The market is “both underpricing the rate-cutting cycle and reflects estimates of neutral policy rates that appear too high,” Goldman Sachs analysts Clemens Grafe and Andrew Matheny wrote in a note to clients on Thursday. While the recent rally in Russian Eurobonds suggests the market has reassessed geopolitical risks, “this is not yet, in our view, fully reflected in the local bond curve,” they said.

Russian assets have rebounded since Brent crude bounced back from a six-year low in January and a cease-fire took hold in eastern Ukraine almost a month ago. The rally, which handed investors in local-currency debt the biggest returns in emerging markets in the past month, is giving central bank Governor Elvira Nabiullina space to further unwind a 650 basis-point emergency rate increase to an 11-year high of 17 percent in December.

Bigger Reduction

Policy makers reduced that rate to 15 percent at their January meeting. A cut of another 200 basis points this week is “almost as likely” as the Goldman Sachs’ base scenario for a one percentage-point reduction, the bank’s analysts said.

The five-year OFZ yield declined for a second day to the lowest since Feb. 20. Longer-dated securities due in August 2023 rose for a third day, pushing the yield down nine basis points to 12.95 percent.

“Investors are buying bonds on expectations of a rate cut and will sell them after the rally,” Konstantin Nemnov, who oversees $1 billion as the head of fixed income at TKB BNP Paribas Investment Partners in St. Petersburg, said by phone. “We’ll most likely sell fixed-coupon OFZs if the rate is cut, depending on the extent of the rally.”

Forward-rate agreements compiled by Bloomberg showed expectations for a 173 basis-point cut in benchmark borrowing costs in the next three to six months, up from 47 basis points at the start of last week. The MosPrime three-month rate dropped to 16.53 percent, the lowest since Dec. 15.

Oil Effect

Russia’s currency strengthened 1.8 percent to 60.686 per dollar by 3:28 p.m. in Moscow, matching its month-to-date gain that is the most among 24 developing countries monitored by Bloomberg.

The dollar-denominated RTS Index of Russian stocks jumped 2.4 percent to 867.92. OAO Dixy Group climbed 4.9 percent, the first gain in four days after the food retailer said February sales rose 29 percent.

Oil, which along with natural gas accounts for about 50 percent of Russia’s budget revenue, advanced 1.6 percent to $58.44 a barrel in London, trimming its drop in March to 6.6 percent.

As oil recovered, inflationary pressures linked to the weaker ruble have been easing. While February’s inflation rate jumped to a 13-year high of 16.7 percent, the pace of weekly price growth slowed to 0.2 percent in the seven days through March 2 from 0.6 percent.

“The ruble is gaining because of oil’s bounce,” Nikolay Zolotarev, the head of the investment department at OAO MDM Bank in Moscow, said by e-mail. “If oil doesn’t resume its drop, the ruble should strengthen to 59.50 against the dollar.”