Russia is weighing the sale of its first inflation-linked bonds as investors shun regular debt auctions amid the fastest surge in consumer prices since 2011.
Linkers would give investors a hedge against inflation that reached 8.3 percent in October, the result in part of the ruble’s 29 percent plunge this year against the dollar. Finance Minister Anton Siluanov announced the possible sale two days ago at a meeting in the State Duma.
The government has sold about one third of the 459 billion rubles ($9.8 billion) of bonds it planned to issue this year as inflation jumped and the economy teetered on the brink of a recession amid international sanctions tied to theUkraine conflict. Selling linkers could lure buyers concerned that the value of their fixed-income assets is being eroded, while also creating a market for investors’ inflation expectations, according to Ivan Tchakarov at Citigroup Inc.
“Bonds tied to inflation are fully justified given investor interest in protecting the value of their assets,” Konstantin Nemnov, the head of fixed income at TKB BNP Paribas Investment Partners inSt. Petersburg, said yesterday by e-mail. They “should be of interest,” and help “the government as it seeks new sources of funding,” he said.
The Finance Ministry canceled its fifth auction in a row yesterday, citing “unfavorable market conditions,” according to a statement on its website.
The government will prepare the “legal basis” this year for the sale of linkers before testing the market’s appetite for them in 2015, Siluanov said.
The yield on Russian 10-year fixed-coupon bonds rose one basis point to 10.14 percent today, leaving investors with a real yield of 1.84 percent after inflation is taken into account.
The ruble is the second-worst performer this year among all global currencies tracked by Bloomberg, behind only the Ukrainian hryvnia, which slumped 47 percent in the period. The ruble rose 1.6 percent to 45.6035 per dollar at 7:03 p.m. in Moscow.
Three-month implied volatility on the Russian currency versus the dollar reached 27.25 percent on Nov. 7, the most since 2009. It fell 2.39 percentage points to 22.0250 percent today. Russian consumer prices increased 0.2 percent in the Nov. 6-10 period, statistics service inflation data showed today.
“I don’t think it would be really exciting for foreigners,” Viktor Szabo, who helps oversee $13 billion in emerging-market debt as a money manager at Aberdeen Asset Management Plc in London, said yesterday by e-mail. “It’s not the yield level on the nominal bonds or inflation concerns which prevent foreigners from buying Russian local debt, but the FX volatility.”
Developed-nation governments from the U.S. to Italy have boosted inflation-linked bond sales in recent years as they wager that consumer-price growth will remain weak, limiting payments to investors.
U.S. annual inflation was unchanged at 1.7 percent in September and hasn’t been above 2.1 percent since October 2012, according to Labor Department data. Euro-region consumer prices rose at a 0.4 percent pace last month, compared with a target of 2 percent.
The introduction of linkers will help Russia as it moves away from managing the ruble exchange rate and toward inflation targeting, according to Vladimir Osakovskiy, the chief economist for Russia at Bank of America Corp. in Moscow.
Policy makers said on Nov. 10 they will stop selling $350 million daily to support the ruble when it falls beyond its trading band and reiterated that they still could intervene in the foreign-exchange market if they deem it necessary to preserve “financial stability.”
The central bank abandoned its previous intervention policy as the ruble tumbled this year, and itsforeign-exchange reserves dropped 16 percent to $428.6 billion.
“They need a market sense of the inflation outlook,” Osakovskiy said yesterday by e-mail. “Infrastructure needs are more important for this move than actual fiscal needs. With the budget still in a strong surplus, there’s no actual need for borrowing, let alone innovation in this area.”
While the ruble’s slump amid a retreat in oil prices helped stoke inflation, the depreciation has benefited state-run energy exporters, which get their revenue in dollars and have mainly ruble-based costs. That has helped the government boost its budget surplus by 70 percent in the first nine months.
Still, the Russian economy remains under pressure. The central bank on Nov. 10 cut its main growth forecast for next year to zero and pushed back its estimate for meeting its 4 percent inflation target to 2017.
The U.S. and the U.K. this week joined the European Union in threatening to tighten sanctions against Russia. Speaking minutes apart, U.K. Prime Minister David Cameron and U.S. State Department spokeswoman Jen Psaki blamed Russia on Nov. 10 for continuing to arm separatist rebels in eastern Ukraine, where a cease-fire has crumbled over the past week. Russia has denied military involvement.
“What alternatives does the Finance Ministry have now?” Oleg Popov, who helps oversee $1 billion at Allianz Investments in Moscow, said yesterday by e-mail. “It would either have to place short-dated bonds or long bonds at a 10 percent yield. It’s too expensive.”
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