Russia Curve Inversion Extends Before Rates as CPI Slowdown Seen

Bond investors are signaling confidence Russian inflation will continue to slow, potentially helping the central bank back onto a rate-cutting path as early as this week.

Ten-year government bonds rose for a third day, cutting the yield three basis points to 8.69 percent, the lowest since July 2014. That’s 80 basis points less than the 9.48 percent yield on two-year debt, the biggest difference since December, according to data compiled by Bloomberg.

"The long end of the rates curve is more sensitive to the inflation outlook and the trend in policy rates," Konstantin Artemov, a manager of fixed-income portfolios at Raiffeisen Asset Management in Moscow, said by e-mail. "People are buying longer-term bonds on expectations of the central bank resuming easing."

Traders are increasing bets the Bank of Russia at its meeting on Friday will lower rates to help lift the economy from recession after policy makers kept the benchmark borrowing gauge on hold since September last year. At the same time, analysts are split on the decision, with 14 of 30 polled seeing no change while 16 predict a 50 basis-point cut.

The ruble strengthened for a fourth day, advancing 0.2 percent to 65.13 per dollar as of 4:31 p.m. in Moscow, taking its gain this year to 13 percent. The Micex stock index rose for a second day, adding 1.7 percent to 1,947.67, led by lender Sberbank PJSC and oil company Lukoil PJSC. Crude traded above $50 per barrel in London for a second day.

While gains for the ruble and stocks look unjustified, the government’s ruble bonds -- known as OFZs -- may continue their rally, Win Thin, the head of emerging-market strategy at Brown Brothers Harriman, said in e-mailed note.

OFZs will continue to outperform in 2016 because inflation is “likely to continue falling” while the central bank’s next move is “likely” to be a cut, he said.

Forward-rate agreements show derivatives traders are predicting 50 basis points of cuts in the next three months, the most since May 18.

Inflation in May held at 7.3 percent for the third month after slowing since August. That’s midway between the central bank’s current key rate of 11 percent and its end-2017 inflation target of 4 percent.

"Inflation expectations keep declining, the economy has stabilized, its dependency on oil has considerably weakened as oil’s plunge to new multi-year lows in the beginning of the year hasn’t triggered a new wave of recession," Nikolay Minko, analyst at Sberbank CIB in Moscow, said by e-mail. "Both of those factors push the long-term yields downward."

To contact the reporter on this story: Vladimir Kuznetsov in Moscow at vkuznetsov2@bloomberg.net. To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Douglas Lytle