How the sharp rise in the key rate affected the debt market

Last week, the Central Bank unscheduledly increased the key rate by 350 bps at once. p., up to 12%. However, such a significant increase in the financial indicator had an uneven impact on the debt market. Thus, the yield of short-term and medium-term bonds increased noticeably, while the yield on long-term OFZs even decreased. This reflects the expectations of market participants that by the end of this year or early next year, the regulator may return to the practice of lowering the rate.

In defense of the ruble

Last Tuesday, the Bank of Russia held an unscheduled meeting at which raised the key rate immediately by 350 basis points – up to 12%, the maximum since May last year. The abrupt step of the regulator was caused, as market participants believed, by the dissatisfaction of the financial authorities with the growth of the dollar exchange rate above the level of 100 rubles/$.

As a result, the dollar exchange rate at the end of the week rolled back to the values ​​of the beginning of the month, to the level of 93.6 rubles/$. During the week, the dollar fell by 5.8 rubles.

Despite the positive effect on the foreign exchange market, professional participants do not expect the rate hike to continue, as this will be negative for the economy, and therefore expect more active work of the financial authorities with exporters and verbal interventions in support of the ruble.

“Inflation is not accelerating, therefore, there is no reason to raise the rate yet,” says Sergey Konygin, senior economist at Sinara investment bank. At the current rate, Mikhail Vasilyev, chief analyst at Sovcombank, believes that the dollar will remain in the range of 90–100 rubles/$ until the end of the year.

In terms of lending conditions, the current level of the key rate is more than enough to cool demand, but the Bank of Russia left open the possibility of an additional increase in September, said Sofia Donets, Chief Economist for Russia and the CIS+. A tightening of the rate is possible if the dollar exchange rate returns above the level of 100 rubles/$. “In the risky scenario, the key rate may increase to 14–15%,” notes Mr. Vasiliev. He expects the first rate cut in the first half of 2024, when annual inflation reaches its peak. Sofya Donets does not rule out the first decline in the fourth quarter of that year.

Expectations to go down

Changes in the monetary policy of the Central Bank were reflected in the debt market. The yield on the shortest OFZ issue maturing at the end of February 2024 jumped almost 200 bp over the week. p., up to 10.56% per annum. At the same time, yields on bonds maturing in one to three years rose by only 21-76 bp. p., up to 10.25–10.6% per annum. At the same time, the yield of long-term OFZ even decreased by an average of 10 basis points. p., up to 11–11.2% per annum.

A sharper movement in short notes is due to the fact that the market was expecting a rate increase, but by a smaller amount and for several increases.

“Current yields of two-year OFZs around 10.3% per annum and three-year OFZs around 10.5% per annum indicate that the debt market expects a key rate cut in the range of 10-10.5% in the coming quarters,” Mikhail notes. Vasiliev. According to Sofya Donets, there was no significant movement at the far end of the yield curve, including taking into account the already high values, the structure of holders of these securities and limited sales activity. “After raising the key rate, we see active purchases in long OFZs by the most daring participants in the debt market,” Mr. Vasiliev points out.

However, a further increase in the rate in the event of a weakening of the ruble may raise the yield of long-term securities. “Pressure on the long end of the yield curve until the end of the year will depend on the policy of the Ministry of Finance in the primary market, given that the need for borrowing remains significant,” said Ms. Donets. However, according to her, the continued increase in the share of floaters can mitigate this factor. “In the fall, the key rate peak will become clearer and the Finance Ministry’s budget policy plans for the next three years will become clearer,” notes Mr. Vasiliev.

Vitaly Gaidaev