ROSBANK: Market expectations for 2018 – guarded optimism
December 12, 2017
As the New Year approaches, volatility on the OFZ market continues to die out. Last week, yields were heading lower once again, but the magnitude of the move ranged from -5bp / -8bp on the belly of the curve to -2bp / +1bp for the longest fixed-rate benchmarks.
The Russian domestic whereabouts are not surprising much at this stage. The November full-month inflation print arrived at 2.5% yoy as the weekly readings finally returned to 0.1% wow. Announcement of higher FX purchases by the MinFin, at $3.5bn in December, produced limited impact on USDRUB, given heated discussions of the topic in recent months. Finally, the CBR is to hold the MPC meeting this Friday, which – for once – has economic consensus unanimously aligned for a 25bp key rate cut. Our call is no different (please see our full preview here).
On top of the CBR, this week is marked with monetary policy meetings in the US and Europe. The intrigue around the FOMC will likely be linked with possible downward revisions of the median dot for 2019 (here’s a link to the SG Team preview), while the Fed Funds rate hike of 25bp should not surprise a soul. The ECB meeting is largely expected to be a non-event.
Last week, we participated in the Cbonds Congress in St Petersburg, an annual event where analysts, sales, trading, DCM, institutional investors, etc. traditionally exchange views on the Russian bond market. In particular, Rosbank Research led the panel of fixed-income analysts who discussed some of the key topics of 2017 and shared selected insights into 2018.
The base story for 2018 seems more or less aligned across the 6 domestic investment houses who participated in the panel, including:
The ruble slightly tilted to the depreciation side from current levels, inter alia, on higher FX purchases by the MinFin. A quick poll indicated a 60.0-63.2 range for the USDRUB by the end of 2018 (average of 62.0, Rosbank forecast 63.2),
The CBR, nonetheless, moving ahead with monetary easing as inflation normalizes back to the 4% target: a 7.0-7.5% range for the key rate by the end of 2018 (average 7.2%, Rosbank forecast 7.0%),
Russian bond yields heading further down, as primarily propelled by domestic demand: a 6.75-7.3% range for the 10Y OFZ fixed-rate benchmark by the end of 2018 (average 7.1%, Rosbank forecast 6.9%).
Discussion of potential US sanctions on the Russian sovereign debt holdings also took an interesting angle. With foreign ownership as sizeable as it is (particularly on local-currency debt), virtually no one believes that the US will introduce very severe sanctions. With that said, the knee-jerk reaction to any announcement to this tune would likely be painful, with yields immediately repricing up by 50bp or above. However, as the dust settles, the CBR will likely provide various support measures and, for the medium term, it could actually produce the best entry point for local market participants, valuations-wise. Thus, the impact on the market is unlikely to persist. So, all in all, another constructive year for Russian fixed-income is on the cards? Could be. But let’s clear the sanctions hurdle first.
Company — Bank of Russia
Full nameCentral Bank of Russian Federation