Earlier this month, the Russian Central Bank cut rates for the sixth consecutive time, taking the benchmark rate to 6%. The Central Bank Governor, Elvira Nabiullina, stated at the news conference: “With today’s decision on the key rate, we have reached the lower level of the 6-7% range which we consider to be neutral with the inflation target near 4%.” But she also acknowledged that “There is a relatively high probability of a rate cut at the next meeting, but it’s not guaranteed,” and “In the first quarter of 2020 inflation will be around 2%, according to our calculations. In the middle of the year it will start to rise, gradually returning to the target level. For the end of 2020, we are keeping the inflation forecast of 3.5-4%.”
This is clearly supportive of Russia’s domestic bond markets where bond yields continue to compress. Real rates in Russia are high both globally and in comparison to many emerging markets, even more so with inflation languishing below the Russian Central Bank’s target. Nabuillina acknowledged the issue of the neutral rate stating: “it may change in time under the influence of various factors. We have yet to estimate and, possibly, adjust this range. Objectively, today we still lack sufficient data for this. It will require a longer period of time, maybe even more than a year.” She also noted that the Central Bank’s forecast for inflation to return to target assumes a recovery in consumption and investment which could disappoint if business and consumer sentiment do not pick up. In terms of the Central Bank’s 1.5-2% growth target the Central Bank is awaiting the government’s amendments to the budget to evaluate the impact of fiscal measures.
Eurobonds from Russia also continue to do well given a global backdrop where yield is increasingly hard to come by and USD13.4tn of bonds trade on negative yields. Sanctions remain a risk with Russia/Russian related names but there is still strong market demand for issuance from Russian issuers: this week Gazprom, a Baa2 (Moody’s)/BBB (Fitch) rated issuer came to the market with a USD2bn dollar denominated 10 year bond deal issued at a coupon of 3.25% and which was ~2x covered. We prefer Gazprom 8.625% 2034, which trades on a yield of 3.7%, as it screens a bit better on our RVM (relative value model) but this bond has been a stellar performer and has rallied over 30 points since the start of 2019!
USD IG fixed income markets have performed well in 2019. However, we see scope for the further flattening of the USD fixed income yield curve with risks to global growth tilted to the downside (e.g. coronavirus), a benign inflation backdrop and investors continuing to search for yield.