Rogue investors who ignored the negative hype about Russia, are smiling from ear to ear after the ruble gained about 6 percent this week.
The ruble surged 6 percent this past week, opening Monday at 56.55 and closing at 53.5 on the Moscow Exchange on Friday. In the last month alone, the ruble has appreciated by more than 20 percent, RT reported.
During intraday trading Friday, the ruble shot up 3 percent against the dollar, reaching a new 2015 high of 50.42 against the dollar, the biggest upward gyration since October 1998, when the ruble was recovering from the August default and currency crash.
Investors are buying rubles not just to buy rubles, but to get into the Russian bond market, which has been posting high returns compared to European markets. Bond demand is driving up ruble assets, which is why the ruble is rallying.
In short, lower bond prices push investors to get into the game, and push up the ruble. In a global investment climate, where central banks are cutting rates to near zero, Russia provides investors with an opportunity – albeit risky- to make higher returns.
“There is a rally in the Russian government bonds market, and the securities are in rubles, and the only way to participate in this rally is to buy the ruble-denominated bonds, and in order for investors to do this, they have to sell dollars and buy rubles,” Prosviryakov said.
Sovereign Bond Yields
After reaching a high of 16 percent, Russia’s 10-year ruble-denominated sovereign bond yields have been hovering in the teens, and were 11.07 percent.
Five-year treasury bonds, known as OFZs on the Russian market, have been fetching yields in the ballpark of 11.5 percent in weakly bond auctions after hitting premium value of 15.5 percent on January 11, 2015.
“Interest rates on ruble are extremely attractive – you have double digit returns. It comes in an environment when the Swiss issued a 10-year bond at a negative interest rate,” Michael Ingram, a market analyst at BGC partners, told RT.
In January, Standard & Poor’s downgraded Russia’s sovereign debt to below junk investment grade, which politicians in Moscow brushed off as “politically motivated”. The Central Bank said they would no longer accept any ratings issued by the big three western agencies – Standard & Poor’s, Fitch, and Moody’s – that were issued after March 2014.
REPO
As the 5-year and 10-year bond purchasing patterns show, both presented peak returns in mid-January, meaning those getting into the game now might be late. Also, the Central Bank, in response this weeks 6 percent currency gain, decided to quell the speed of the ruble’s appreciation.
In response to the major currency surge, the Bank of Russia said it will increase the REPO rate, which will make it more expensive to borrow foreign currency and in theory stall the ruble’s miraculous rally.
Others have observed that the Central Bank may be artificially inflating the ruble, since at the end of the week that ended April 3, the Russian Central Bank spent $5.5 billion propping up the ruble, even though it had already made sturdy gains in 2015.
“Panic is gone, we have seen that the Russian foreign reserves have stabilized, they actually grew last week, but still are around the $360 billion mark. This is a factor showing the situation has stabilized,” Aleksandr Prosviryakov, said.
The currency, the world’s second worst performer in 2014, is now the best in 2015. The ruble has recovered 15 percent in 2015, and more than 55 percent since December 16, dubbed “Black Tuesday”, when the ruble bottomed out against the dollar at nearly 80/dollar.
