Bank of Russia’s unexpectedly hawkish turn at its last rate meeting and the slump in oil prices are casting a shadow over the third-biggest bond rally in emerging markets.
Bonds slid last week, pushing yields up the most since January and reining in this month’s returns for the country’s debt to 9.2 percent. The retreat still isn’t enough for analysts at banks including Renaissance Capital, Morgan Stanley and Societe Generale SA, who predict government bonds, or OFZs, have further to fall.
OFZs “still do look expensive to us,” Oleg Kouzmin, a Moscow-based economist at Renaissance Capital and a former central bank adviser. “They ignore the risks that oil could be lower, with subsequent implications for the ruble and the policy rate.”
Traders anticipating a resumption of rate cuts scrambled to scale back their bets last week after central bank Governor Elvira Nabiullina warned March 18 that the “moderately tight” monetary policy may last longer than planned. Brent crude capped its first weekly retreat in more than a month amid signs of a persistent glut, while mounting speculation U.S. interest rates will rise as the economy improves boosted the dollar, pushing commodity prices lower.
A report on Friday showing the U.S. economy grew more than forecast in the fourth quarter may bring further headwinds for oil and Russian assets, according to Kouzmin, who said yields need to rise further to make bonds attractive.
Five-year bond yields increased 19 basis points, or 0.19 percentage point, last week to 9.30 percent, more than double the gain for equivalent Polish debt. That’s the most since the 84 basis-point jump in the week ended Jan. 15, when crude tumbled 14 percent.
If oil continues to weaken, Morgan Stanley predicts the rate on 10-year notes will climb by 50 basis points. Investors have been too optimistic about the pace of the central bank’s rate cuts this year, analysts led by London-based Min Dai wrote in a report March 24.
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Brent, the benchmark grade for more half the world’s oil, retreated 1.8 percent last week to $40.44 per barrel. While an average price of $45 this year would allow the central bank to tackle the country’s recession with a 2 percentage-point rate cut, RenCap’s Kouzmin says oil at $40 would only allow policy makers to loosen policy by half that amount.
Derivatives traders scaled back bets on rate cuts last week, with forward-rate agreements on March 24 showing 64 basis points of reductions over the next three months, down from 86 basis points in the run-up to Bank of Russia’s rate decision.
Yury Tulinov, head of research at SocGen’s unit Rosbank PJSC in Moscow, is recommending investors bet against the government’s February 2027 bond over the next month. The yield on the security needs to rise to 10.25 percent, from 9.19 percent now, to make the securities attractive, he said.
“OFZs still look overvalued in light of the central bank’s reluctance to ease its monetary policy,” he said.
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