Russian bonds flat ahead of Central Bank of Russia’s policy meeting

The Russian bonds were trading nearly flat on Monday as investors await Central bank of Russia (CBR) monetary policy meeting. The benchmark 10-year bonds yield, which is inversely proportional to the price of bonds, rose 0.54 pct to 9.240 pct and 2-year bonds yield climbed 0.11 pct to 9.470 pct at 1200 GMT.

The Central Bank of Russia is likely to hold its key interest rate at 11 pct on Friday during its monetary policy meeting according to Danske Bank. With the appreciating ruble and constant drop in RUB volatility, the central bank is expected to keep a softer tone during the meeting as inflation has slowed down. However, the high base effect will decline in near future that supports the cautious stance of CBR, noted Danske Bank.

Meanwhile, the continued rise in oil prices gives leeway for proper guidance from CBR regarding the forthcoming monetary easing. In the past 30 days, the Russian ruble has appreciated on average by 3.9% against EUR and 5.7% against the US dollar. Even though the market expects the Russian central bank to lower rates sometime in 2016, it is unlikely to take any action on Friday, said Danske Bank. The CBR, during its previous meeting in March stated that it might moderately tighten its policy for a longer period of time than expected earlier.

“We believe a 50bp key rate cut is possible in early Q3 16. Otherwise, we believe any oil price weakening and deterioration of global risk sentiment would shift the cut into Q4 16. We still see the key rate falling to 9.5% by the end of 2016”, added Danske Bank.

The Brent crude oil, a global benchmark for Russia's main export, was plunged after traders took profit following the weekly surge after Crude oil prices jumped to 5-month high and report that Saudi Arabia could maintain its total crude output volume with the expansion of an oilfield, injecting fresh concerns about the global supply glut. The International benchmark Brent futures fell 0.80 pct to $44.73 and West Texas Intermediate (WTI) tumbled 0.75 pct to $43.40 by 1200 GMT.

Lastly, if unemployment, inflation and GDP growth fail to improve over the coming months, easing will occur sooner rather than later, pushing bonds prices further up.