Russian Bonds Head for Biggest Drop Since January on CPI Uptick

(Bloomberg) -- Russian government bonds headed for their worst weekly performance in six months after oil retreated and accelerating inflation raised concern the central bank will be forced to slow the pace of rate cuts.

Five-year OFZ bonds had their biggest five-day drop since mid-January, driving the yield up 30 basis points. While the ruble is set for a 0.7 percent depreciation this week, the currency has so far lagged the 7 percent slide in crude, Russia's main export earner.

An emerging-market rally is fading after investors betting that global central banks will pursue further stimulus to counter the fallout of Britain's vote to leave the European Union drove up asset prices. Russian markets have also been punished by the retreat in crude and sticky inflation, which accelerated in June and reduced prospects for quick monetary easing.

"Expectations for an inflation slowdown and central bank rate cuts have cooled down," Alexey Tretyakov, a bond fund manager at Aricapital asset management in Moscow, said by e-mail. "The central bank will most likely continue to cut, but with rates incompatible with previous expectations of investors who drove the OFZ yields close to 8 percent."

Annual inflation in Russia accelerated to 7.5 percent in June from 7.3 percent in the previous month, the first uptick in 10 months, data this week showed. Inflation expectations in June are “elevated,” the central bank said on Thursday. While Bank of Russia's Governor Elvira Nabiullina cut the key rate by 50 basis points last month, she warned that future reductions will depend on trends in price growth.

Government bonds fell for a fifth day, increasing the yield two basis points to a two-week high of 8.85 percent. The ruble traded 0.6 percent stronger at 64.1775 per dollar, as Brent crude climbed 1 percent after a 4.9 percent collapse on Thursday. Crude and natural gas account for about 60 percent of Russia's export earnings. The Micex stock index fell 0.4 percent, poised for a 1.2 percent decline in the week.

“The second wave of worries about the implications of Brexit, European banks and prospects for commodities prices has finally reached OFZs, lowering appetite from foreign investors," Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said by e-mail.

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, Cecile Gutscher