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By Bloomberg

Russian government bonds fell for a third day as the Finance Ministry prepared to sell debt and investors speculated the impact of potential rate cuts is factored into prices. Stocks dropped as Brent crude slid.

The yield on five-year ruble-denominated notes, known as OFZs, climbed five basis points to 10.75 percent at 12:14 p.m. in Moscow. The ministry will offer 15 billion rubles ($263 million) of bonds on Wednesday.

The decline in bonds comes after an eight-day rally through July 17, when the yield fell by 81 basis points, amid optimism that slower inflation will give the central bank more room to lower interest rates. Analysts’ consensus estimates expect a reduction by 150 basis points by the end of 2015, while forward- rate agreements signal a cut of 37 basis points in the next three months.

“Fixed-rate bonds have already priced in quite a lot of rate cuts,” Dmitri Barinov, who manages $2.6 billion of assets at Union Investment Privatfonds GmbH in Frankfurt, said by e- mail. “I am more skeptical and expect inflation to remain stubbornly high. So I like floaters and linkers more.”

Even after a 26 basis-point increase in five-year yields, local-currency sovereign notes are the best performers among 31 emerging markets tracked by Bloomberg, having returned 31 percent this year. The Micex Index of stocks has rallied 16 percent and is yielding the highest risk-adjusted returns among the so-called BRICS nations.

‘Gains Overdone’

With Russia’s economy heading for an estimated 3.5 percent contraction in 2015, the scope for the central bank to reduce borrowing costs remains intact. Nevertheless, last week’s rally may have gone too far, Credit Suisse Group AG analysts Nimrod Mevorach and Amos Ruiz wrote in an e-mailed note dated July 20. Policy makers have cut the key rate by 550 basis points so far this year.

“Last week’s OFZ rally seems to have been driven by positioning much more than changes in the policy-rate outlook,” they said. “Macro data supports further decline in OFZ yields but a slower pace of monetary-policy easing and overweight positioning by non-residents would prevent the recent rally from extending.”

The Finance Ministry will offer 10 billion rubles of fixed- rate OFZ bonds due January 2028 and 5 billion rubles of May 2020 fixed-rate bonds, according to a website statement.

The ministry may “need to offer a premium” at today’s auction, Fedor Bizikov, a money manager at GHP Group, said by e- mail. “All depends on where the oil will go.”

Last Sale

Russia sold 75 billion rubles of debut inflation-linked securities last week. Of investors who bought them, 71.4 percent were Russian, while U.S. investors accounted for 11.1 percent and U.K.-based investors contributed 14.1 percent, the Finance Ministry said on its website Tuesday.

Brent crude lost 0.7 percent to $56.65 a barrel. Oil is Russia’s main export commodity.

The Micex Index slid 0.5 percent, with energy producers OAO Gazprom and OAO Surgutneftegas leading declines. The dollar- denominated RTS lost 0.8 percent.

OAO Magnit climbed 1.5 percent. Second-quarter sales rose 28 percent from a year earlier, while earnings before interest, taxes, depreciation and amortization climbed 30 percent, the nation’s biggest food retailer said.