Russian bonds rally as Ruble gains with crude oil prices

The Russian bonds rallied on Monday, as the ruble was bolstered by a rebound in crude oil prices, pushing the yield on 10-year bonds down 5 basis points.

The benchmark 10-year bonds yield, which is inversely proportional to the price of bonds, fell 5 basis points to 8.650 percent, yield on super-long 20-year bonds also tumbled 17 basis points to 8.820 percent and 2-year bonds yield dipped 10 basis points to 9.390 percent by 10:40 GMT.

The Brent crude oil, a global benchmark for Russia's main export, rose by tracking weak greenback and easing fears of a UK exit from the European Union. The International benchmark Brent futures rose 1.8 percent to $50.05 and West Texas Intermediate (WTI) climbed 1.63 percent to $48.76 by 10:40 GMT.

The Bank of Russia cut its key interest rate in its monetary policy meeting held Friday, citing steady ongoing inflation as the bedrock cause for the move. The central bank slashed the policy rate by 50 basis points to 10.5 percent, making a close call.

Also, the bank also flagged another possible rate cut, based on estimates for inflation risks. Inflation came in at 7.3 percent for a third consecutive month in May, according to the central bank.

Moreover, the Russian economy in the first quarter of this year contracted 1.2 percent year-on-year, as compared with contraction of 3.8 percent year-on-year in the last quarter of 2015. Given the Brent year average of USD 48.6 per barrel and on improved oil price outlook, the Russian economy is now expected to contract 0.6 percent year-on-year in 2016, said Dankse Bank in a research report.

The economy continues to adjust to a new normal of lower oil prices and western sanctions. In the January to April period, the GDP of Russia shrank 1.1 percent year-on-year and contracted 0.1 percent on sequential basis in April.

“We have cut our 2017 GDP growth forecast to 1.2 percent y/y from 1.8 percent y/y previously due to delayed monetary easing cycle,” added Danske Bank.

According to Bloomberg, Russia’s 2015 current-account surplus rose 13 percent from a year earlier to $65.8 billion while net capital outflow slowed by 63 percent $56.9 billion from a year earlier, according to Bank of Russia estimates posted on Monday. Net demand for foreign currency among Russian households declined 62 percent to $1.25 billion in November.

In addition, the lifting of international sanctions on Iran has helped move the correlation between Brent and the ruble toward its strongest since October. Russia’s budget for 2016 is based on oil priced at $50 a barrel and President Vladimir Putin’s government is weighing austerity measures to counter shrinking revenue.

Meanwhile, the ruble appreciated to 64.07 per dollar as Brent rose 1.8 pct to $50.05 a barrel. The Micex Index of equities bounced 1.88 percent to 189,750 10:40 GMT.