Ruble Bonds Rally as Bank of Russia's Half-Point Cut Surprises

(Bloomberg) -- Russian bonds rallied the most in nine months after the central bank accelerated a rate-cutting cycle with a bigger-than-expected reduction.

The yield on ruble-denominated debt maturing in February 2027 fell the most since June after the central bank lowered the benchmark borrowing rate by 50 basis points. The currency was little changed at 56.94 against the dollar after earlier advancing as much as 0.6 percent.

Russian bonds have already handed investors some of the highest returns in emerging markets this year as traders bet that falling inflation and the ruble’s surge would prompt the central bank to start deeper cuts. Still, today’s move caught traders by surprise after policy makers reduced the benchmark by just a quarter-percentage point in March after a six-month pause.

“They’ve got considerable room to cut given where inflation is going,” Jim Barrineau, the co-head of emerging markets debt for Schroder Investment Management, said by phone. “We think it’s going to remain a very attractive story.”

The bonds advanced earlier this week, while the ruble weakened, after President Vladimir Putin said the government is taking measures to limit the currency’s world-topping rally in the past six months. Six of 42 economists forecast Friday’s rates move, while the rest saw a reduction of 25 basis points.

The ruble’s gains earlier in the day were partly driven by foreign investors converting dollars to buy local-currency bonds, according to Sergei Strigo, the London-based head of emerging-market debt at Amundi Asset Management, which oversees more than $1 trillion. Hedging the ruble is expensive and the carry-trade is still appealing, so most bond investors end up also taking ruble exposure as well, he said.

Foreign investors poured a record 159 billion rubles ($2.8 billion) into Russia’s local-currency debt in March, expanding their share of the market to almost 30 percent. The strong demand means there’s little risk of substantial ruble weakening, the central bank said in a report published earlier this month.

Russian stocks also gained, with the benchmark Micex Index climbing 0.3 percent, set for its best weekly advance since January.

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