The Russian government debt market is steadily rolling downhill as the date for the imposition of US sanctions approaches, inflation in the country is accelerating, and banks are beginning to predict a sharp and rapid increase in the key rate of the Central Bank of the Russian Federation.
In trading on Wednesday, the RGBI index, which tracks prices of federal bonds, broke through the “bottom” shown in April, and updated the minimum values for the last 14 months.
For nine consecutive days of almost recoilless decline – the second longest such period in 9 years of trading history – the index dropped to 143.78 points, raising to 7% and above the yield of all government securities for a period of six years.
The market is winning back statistics on May inflation, says Yuri Popov, strategist at Sberbank CIB. According to Rosstat, last month the growth rate of consumer prices accelerated to 6% and renewed the record since October 2016, while core inflation, excluding volatile components, reached a 6-year peak.
As a result, “investors began to play out the scenario of a possible aggressive increase in the key rate” at the meeting on Friday, says Georgy Vaschenko, head of the trading operations department at the Russian stock market at Freedom Finance.
Analysts, who generally expected Elvira Nabiullina to make a cautious step up by 25 bp, revised their estimates and now almost unanimously predict a 50 bp spike in the rate. At the same time, Goldman Sachs and BCS Global Markets admit an increase of 75 basis points at once.
The money market quotes include three 50 bp hikes in a row. each, up to 6.5% per annum at the end of the year. This is understandable: due to the effect of the low base of last year, inflation will continue to accelerate and in the summer may reach 7%, Rosbank predicts.
The realization that the Central Bank will begin to sharply tighten the screws of monetary policy puts pressure on OFZs, despite the fact that rates on the markets of developing countries are generally decreasing, says Dmitry Polevoy, Investment Director of Loko-Invest.
In addition, from next week, sanctions will come into force, prohibiting American financial institutions from participating in primary placements of ruble securities, he recalls.
In January-April, non-residents dumped OFZs by 310 billion rubles, and their market share for the first time in 6 years dropped below 20%.
At the end of May, however, foreigners started shopping: over the past two weeks, they invested $ 0.6 billion, estimates ING.