Russia's surprise rate cut sets up rouble bond rally

Russia's unexpected interest-rate cut and the first decline in the benchmark MosPrime interbank rate in nine days are spurring bets for a rally in rouble bonds. Bank Rossii lowered its refinancing rate to eight per cent from 8.25 per cent, a move forecast by two of 22 economists in a Bloomberg survey, and cut the so-called repo rate for fixed repurchase agreements by a quarter point to 6.25 per cent on December 23. The three-month MosPrime rate banks charge each other on loans fell from a two-year high of 7.27 per cent on December 23, the first decline since December 12. It was 7.26 per cent yesterday. ‘Neutral effect' The central bank's decision to start easing lending conditions will help lower yields on government rouble bonds by 35 basis points during the next month, according to Otkritie Capital, while UralSib Financial Corp called for a 100 basis- point drop in the year ahead. Russia's domestic bonds have returned 5.3 per cent, less than a third of the 17.1 per cent jump for Brazilian government bonds, JPMorgan Chase & Co indexes show. "The central bank's move is very positive for rouble debt, mainly due to the fixed repo rates decreasing," Evgeniy Vorobiev, fixed-income portfolio manager at Otkritie Capital in Moscow, said December 23. "Funding will be cheaper, so yields will decline." While Brazil cut its benchmark Selic rate 150 basis points since August 30, Russia's 25 basis-point refinancing rate cut last week is the first since June 2010. The yield on Russia's rouble bonds due 2016 was unchanged yesterday after falling four basis points to 8.12 per cent, the lowest level since December 16. The yield on 2018 notes gained two basis points to 8.42 after sliding five basis points to a one-week low of 8.4 per cent. The MosPrime rate had climbed 39 basis points this month as the central reduced the amount of short-term cash offered at its overnight repo auction to an average of 159 billion roubles (Dh18.7 billion) from 476 billion roubles in November, according to data compiled by Bloomberg. A shortage of roubles in the banking system will help Bank Rossii keep inflation lower in 2012, the regulator said in the statement December 23. The overnight MosPrime rate fell for a second day to 6.19 per cent from 6.34 per cent. While cutting some of the higher borrowing rates, Bank Rossii raised its overnight deposit rate, which it uses to withdraw excess cash from the banking system, to four per cent from 3.75 per cent. The combination should have a "neutral" effect on lending conditions while helping to keep money-market rates within the central bank's targeted range, the regulator said in the statement. ‘Positive signal' The central bank's decision is "positive" for the rouble debt market, although not "radical" enough to completely alleviate liquidity problems, said Vladimir Osakovskiy, chief economist for Russia at Bank of America Merrill Lynch in Moscow. Osakovskiy was one of the two who predicted the cut in the refinancing rate cut along with Citigroup Inc analysts. "This is an attempt to slow further increases in the cost of rouble funding," Osakovskiy said by phone December 23. "The impact on the debt market will be limited because the main rate, direct repo, wasn't lowered. But overall this is a positive signal that will support prices." Osakovskiy said the regulator will probably cut the refinancing rate by 100 basis points and the direct repo rate by 75 basis points in the next six months. The overnight auction-based repurchase rate, Bank Rossii's main lending tool, is staying at 5.25 per cent, according to the December 23 decision. Continued "extremely tight liquidity conditions" raise doubts about the functioning of the local bond market and Russia's borrowing plans for next year, analysts led by Alexei Moiseev, chief economist at VTB Capital in Moscow, said December 23 in an e-mailed note. "In this regard, another fixed repo cut of at least 50 basis points is highly advisable to keep the local bond market functioning," they wrote. The rouble gained 0.2 per cent to 31.145 per dollar yesterday, after strengthening 2.6 per cent against the greenback last week.