Russia’s ‘New Era’ of Easing Sends Yields to Lowest Since 2008
Traders Embrace Russia’s ‘New Era’ as Easing Goes Up a Gear
(Bloomberg) --
Russia’s biggest rate cut in two years was well flagged by Governor Elvira Nabiullina, but traders still hadn’t quite convinced themselves she would deliver.
When it came, the move gave an extra boost to one of the strongest bond rallies in emerging markets this year, driving generic 10-year yields to their lowest since before the 2008 financial crisis. The ruble added to its advance and was one of the biggest gainers among peers on Friday.
“It was a close call,” said Piotr Matys, a strategist at Rabobank in London. The big cut “accompanied by dovish forward guidance should stimulate demand for Russian bonds amongst foreign investors and the ruble will benefit from that as well,” he said.
Nabiullina’s comments a week earlier had put a more aggressive reduction in play, but just over half the economists surveyed by Bloomberg were still predicting a quarter-point reduction going into Friday’s decision. Forward rate agreements showed derivatives traders expected something similar.
After the cut, ten-year notes extended gains, lowering the yield ten basis points and putting it on track for a fifth week of declines. The ruble climbed 0.5% against the dollar, snapping three days of declines and adding to the best run among peers in the year.
The half-point reduction, accompanied by language indicating more easing is possible, marks the start of a “new era of growth-supportive policies,” according to Elina Ribakova, deputy chief economist at the Institute of International Finance in Washington.
Russia is joining other developing nations like Turkey and Ukraine with bigger-than-expected rate cuts aimed at countering below target inflation and sluggish growth. High real yields are giving policy makers the confidence to hack back key rates without spooking currency markets -- bond returns far above anything available in developed markets ensure investor inflows.
Read More: Super Thursday Won’t Narrow World’s Interest-Rate Divide: Chart
As for Russia, this year’s rally has made the threat of tougher U.S. sanctions, which weighed on bonds and currencies in 2018, seem like a distant memory.
--With assistance from Srinivasan Sivabalan.
To contact the reporters on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net;Áine Quinn in Moscow at aquinn38@bloomberg.net
To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Constantine Courcoulas, Natasha Doff
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