The rate cut from 11% to 10.5% is expected to spur investment
In 2015 it looked like a nightmare. Russian bond prices were collapsing, yield — naturally — was heading as high as 14%. But for investors who like to buy when there’s blood in the streets, that was the time to overload. Since then, the spread between the Russian 10 year bond and the Emerging Market Bond Index (EMBI) is closing. The closer Russia’s bond prices move to the EMBI, the higher those bond prices go. In a yield hungry world, if investors keep believing that Russia can service its debts — and it can — and if inflation remains under control, then Russian bonds might be a good bet for global fixed income investors.
Russia’s Central Bank cut interest rates on Friday, in line with expectations. The key rate went from 11% to 10.5%. Central bank governor Elvira Nabiullina gave a fairly dovish statement, saying the outlook for the economy was improving and more rate cuts “would be considered” if consumer inflation keeps slowing.
Nabiullina has watched over some troubled times in Russia. She de-pegged the ruble from the dollar in November 2014 and then raised interest rates twice in a week-long period. The ruble went from a trading band in the 30s, to about 70 to 1 in a month. The market thought Nabiullina had lost control. Bond prices were sold at a loss. But some Russian banks moved in quickly, buying what was on the verge of becoming a distressed asset. It was the perfect bond investment at the time. It’s paying off handsomely this year.
Russia’s economy is still hit-or-miss. The economy recorded better-than-expected first quarter GDP, but is still contracting.
The rate cut is “welcome news,” says Craig Botham, an emerging markets economist with Schroders in London. “Both industry and the consumer have exited the freefall, but a recovery is still lacking. We don’t expect the rate cut to revive household spending,” he says, but cheaper financing costs should reduce headwinds for banks and companies who, back in the fourth quarter, said they were not going to take out loans to finance expansion with lending rates over 14%.
Botham said on Friday that Nabiullina could have been more dovish. If the Russians are anything it is cautious. Botham expects further rate cuts this year, bringing it all the way down to 9% by year end.
A disinflation trend should take hold in July, particularly with currency risk reduced thanks to firmer oil prices, Botham said.