(Bloomberg) -- Russia’s yield curve is looking normal for a change, a reflection of fading prospects for monetary easing as sentiment turns more downbeat about emerging markets.
The toughest round of U.S. sanctions against Russia to date as well as the ruble’s slump have put an end to a bond-market anomaly that’s kept local debt yields below the key interest rate since 2015. The Bank of Russia last month held its benchmark unchanged for the first time in nine months, saying the potential for policy easing has declined.
“The flip in the yield-rate curve means that a rate cut in June seems unlikely,” said Eric Vanraes, who oversees a bond fund from Geneva for EI Sturdza Investment Funds, which has about $3 billion under management. “The love story between investors and emerging markets is in a bad shape.”
While largely immune to the turmoil gripping nations from Turkey to Argentina, Russia has had its share of trouble. Even as oil, Russia’s key export earner, surged since the start of April, the ruble has lost about 8 percent as a stronger dollar and rising U.S. Treasury yields draw investors away from developing nations.
“Yields trading higher than the key rate has more to do with the ruble puke changing the inflation outlook and taking out rate cuts,” said Paul McNamara, who oversees about $11 billion in developing-world assets at GAM UK Ltd. “Long-term, we believe the Bank of Russia will be forced to resume rate cuts because of stronger oil and economic growth.”
While it’s unusual for bond yields to trade below the key policy rate, in Russia the aberration coincided with one of the best bond rallies in the emerging universe amid steady monetary easing as inflation fell.
This year, however, Russian ruble bonds are among the worst performers in emerging markets with a loss of about 5 percent in dollar terms. Since the sanctions were announced in April, local-currency government securities known as OFZs have dropped almost 8 percent.
“With the exchange rate weaker and oil prices higher, rate-cut expectations are off the table,” said Richard Segal, a senior analyst at Manulife Asset Management Ltd. in London. “If the ruble strengthens, then OFZs will be a good investment. But not on bets that the key rate will be reduced.”
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