Russia plans its biggest sale of bonds in rubles amid expectations the central bank’s decision to keep benchmark interest rates on hold will lure demand for government debt.
The Finance Ministry will auction a total of 75 billion rubles ($2.4 billion) of so-called OFZs today, the largest amount offered since the central bank began collating the data in 2003. Russia sold less than 10 percent of the OFZs offered at last week’s auction, the lowest demand since at least the end of June, according to Bank Rossii data.
Finance Minister Alexei Kudrin is seeking to raise 1.2 trillion rubles of local debt financing to plug a budget deficit the government said in June could reach 2.4 trillion rubles, or 5.4 percent of gross domestic product. Bank Rossii left its refinancing rate at 7.75 percent yesterday and said in a statement that key rates will be unchanged in “coming months.”
“Investors may be less demanding of the government to pay higher yields now that rates will remain on hold for the foreseeable future,” Alex Ermak, a senior fixed-income analyst at the treasury department of OAO Sberbank, Russia’s biggest lender, said in a telephone interview yesterday. “It boosts the likelihood that the sale will go better than last week.”
Prime Minister Vladimir Putin’s administration has sold 263 billion rubles of OFZs so far this year, according to central bank data, or 22 percent of the target amount. The government may need to tap as much as 75 percent of the nation’s $40.6 billion Reserve Fund this year to help cover spending needs, Deputy Finance Minister Dmitry Pankin said in July.
Drought Effect
Russia will issue 35 billion rubles of existing bonds due in July 2015 and 40 billion rubles of securities due in August 2012, according to the Finance Ministry. Gains in the OFZs due July 2015 cut the yield to 7.19 percent today from 7.22 percent on Aug. 25, according to data compiled by Bloomberg. OFZs due in 2012 yield 5.82 percent, down 1 basis point, or 0.01 percentage point, in the past week. A rally in benchmark OFZs due Nov. 26, 2014 reduced the yield by 8 basis points since the Aug. 25 auction.
The yield on Russia’s dollar bonds due 2020 fell 13 basis points yesterday, the most since Aug. 2, to 4.73 percent. The bonds yield 4.67 percent today, down 5 points.
Investors have been anticipating Bank Rossii may lift interest rates as higher food prices caused by the country’s drought led banks including Citigroup Inc., UniCredit SpA and ING Groep NV to increase their inflation forecasts. Forward rate agreements pointed to a 55-basis point jump in rates over the next three months, Bloomberg data show.
Inflation may climb to as much as 8 percent this year because of higher food prices, Deputy Economy Minister Andrei Klepach told reporters in Moscow Aug. 30, revising a previous forecast of as little as 6 percent.
‘Supportive Factor’
Bank Rossii’s decision to keep rates on hold for coming months will probably be a “supportive factor” for the auctions today, said Mikhail Galkin, the head of fixed-income research in Moscow at VTB Capital, the investment banking arm of VTB Group, Russia’s second-largest bank.
“The central bank said we’re not seeing a monetary-driven inflation spike,” he said. “The short-term risk of rate hikes is now not on the table and the people that were alarmed may have calmed down a bit.”
The Finance Ministry’s Pankin didn’t respond to a telephone call seeking comment yesterday. Kudrin declined to comment on the possible outcome of today’s auctions when questioned by reporters in Moscow today.
The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 2 basis point to 177, according to data provider CMA at 9 a.m. in London. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Default Swaps
Russia credit-default swaps cost the same amount as contracts for Turkey, which is rated four levels lower at Ba2 by Moody’s Investors Service. The difference has narrowed from Russia being 40 points ahead on April 20.
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries was 5 basis points lower at 234, according to JPMorgan EMBI+ Chase & Co. indexes. The yield difference compares with 164 for debt of similarly rated Mexico and 227 for Brazil, which is rated two steps lower at Baa3 by Moody’s.
The spread on Russian bonds is 64 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.
The ruble declined for a second day, slipping 0.1 percent to 30.8225 per dollar, after weakening 0.3 percent yesterday. The currency has dropped 1.8 percent so far this year. Non- deliverable forwards show the ruble at 31.0338 per dollar in three months, the weakest since Aug. 25.
‘Double Dip’ Risk
All 13 economists surveyed by Bloomberg predicted the refinancing rate would be left unchanged this week.
The rate decision was “widely expected,” so won’t have much impact on demand for OFZs, said Elena Kolchina, head of fixed-income products at Renaissance Asset Managers in Moscow, a unit of investment bank Renaissance Capital.
“Market participants are now more concentrated on global factors and concerns regarding a global double dip,” she said in an e-mailed response to questions from Bloomberg. “We don’t expect the auctions to attract high demand on the back of falling global equities and weaker oil.”
In the Aug. 25 auctions, Russia sold OFZs due June 29, 2011, at an average yield of 4.48 percent, 3 basis points more than the bonds’ 4.45 percent market yield on Aug. 24. The ministry also sold OFZs due Aug. 3, 2016, at an average yield of 7.39 percent, 8 basis points more than the 7.31 percent market yield the day before the auction, according to data compiled by Bloomberg.
At last week’s auction, Russia sold 3.1 billion rubles of the 33.5 billion rubles in June 2011 OFZs offered and 1.34 billion rubles of the 15 billion rubles of 2016 bonds, according to Bank Rossii.
Need for Martini
IFC Metropol, a Moscow-based investment bank, won’t be lured back to the OFZ market unless the government offers yields 10 to 15 basis points above the market rate, said Alexey Krivolap, the bank’s vice president of fixed income sales.
“We need more juice,” he said. “And if the volatility continues to increase just juice won’t be enough, we’ll need to add some martini in to it, that means 20 to 30 basis points.”
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