Bond sales increased demand as yields in Stoke 6 months ago

Russia sold more bonds offered for the first time, accepting the highest performance in six months as the prospect of higher interest rates increases the cost of financing its budget deficit.

The Ministry of Finance sold 6.5 billion rubles ($ 209 million) of bonds maturing in August 2012 Yesterday, more than 5.9 billion rubles planned for a yield of 6.1 percent, the highest highest since June 2, according to data compiled by Bloomberg. The government also issued 10.4 billion rubles of OFZs per call in July 2015 with a yield of 7.26 percent, the highest end of the guidance given on 7 December.

Inflation that the government expects to exceed its target of 8 percent this year is beginning to "worry" Central Bank Chairman Sergei Ignatiev rossii Bank said yesterday. Traders expect the benchmark rates at historic low-rise in more than half a percentage point from a low of 2.5 percent over the next three months, according to futures contracts on the rate, after 14 cuts from April , 2009 and May this year.

"With the monetary tightening on the horizon in the first quarter and higher inflation have to offer a higher premium," said Dmitry Gourov, emerging markets strategist at UniCredit SpA, by telephone from Vienna yesterday. "OFZs will become a best buy in the coming year when rates go higher."

Brazil offered investors a yield of 12.208 percent of its domestic bonds due in January 2015 last week, two basic points of the highest rate since the securities were sold for the first time in September, according to data compiled by Bloomberg. The yields of the real South American country, due in January 2014, the yield 12.385 percent, up from 11,373 percent when last offered in August, according to the data.

Brazil Rates

Traders in the futures market are betting interest rates in Brazil will increase its benchmark rate by at least 25 basis points, or 0.25 percentage point to 11 percent in January, according to Bloomberg data. The central bank kept the benchmark rate at 10.75 percent yesterday. Consumer prices rose 5.63 percent in November from a year earlier, the highest since February 2009. The central bank targets annual inflation of 4.5 percent, plus or minus 2 percentage points.

Russia has sold 558 billion rubles of OFZs this year, or 67 percent of 839 billion rubles for 2010, based on central bank data.

"The Ministry of Finance has a large stock of debt has not yet and that is why it sold more of this week," said Konstantin Kostrub, chief fixed-income trading at ING Groep NV, phone from Moscow yesterday. The auction was the first time the government sold more debt than expected, he said.

Spending Reserves

The government has used its reserve fund, one of two sovereign wealth funds to finance the country's budget deficit in 1999 seconds. The fund fell 33 percent this year to 40.9 billion U.S. dollars. The government plans to spend $ 20 million fund in December and $ 10 million next year, Deputy Finance Minister Dmitry Pankin said at a conference in London on 30 November.

"Ideally the government should not use the Reserve Fund," said Kostrub. "It's in the interest of the Ministry of Finance to bring these levels," he said, referring to increased sales OFZs yesterday.

The ruble was little changed at 31.0449 per dollar 13:03 in Moscow today, after rising to the highest level since 19 November. non-deliverable, or opinions that provide guidance to the expectations of currency movements and interest rate differentials and allow companies to hedge against currency movements, show the ruble at 31.3078 per dollar in three months.

Extra Performance

Russian bonds in 2020 the dollar rose during the first day this week, pushing the yield 11 basis points below 4.82 percent. The ticket prices in rubles by August 2016 the country also won, leaving production unchanged at 7.31 percent.

The extra yield investors demand to hold the Russian debt rather than U.S. Treasuries fell 3 basis points to 196, according to JPMorgan EMBI + index. The spread of so-called compared with 128 for Mexico's debt with similar qualifications and 166 for Brazil, which is rated two steps below Baa3 by Moody's.

The spread of Russian bonds is 32 basis points below the average for emerging markets, down from a maximum of 15 months from 105 in February, according to JPMorgan indexes.

The cost of protecting Russian debt against default by five years using credit-default swaps fell 1 basis point to 143 points today, down from the peak this year of 217, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent of a government or a company fail to adhere to its debt agreements.

Overnight Rates

Swaps credit-default for Russia, rated Baa1 by Moody's Investors Service, the third lowest investment grade rating, cost 17 basis points more than the contracts in Turkey, classified as four levels lower than Ba2. Russia swaps cost as much as 40 basis points less on 20 April.

Overnight rates on ruble interbank deposits rose 5 percent to 30 November, the highest since Jan. 25. MosPrime, the average rate Russian banks charge to lend money to each other overnight, hit a 11-month high of 4.78 percent last week. Ruoni, the average rate banks charge 31 to pay rubles each other, reached 4.43 percent, the highest since March 30.

The Ministry of Finance said that November 23 was delayed a December 01 auction to sell 15.2 billion rubles of bonds in November 2014 and 10.5 billion rubles in June 2011 to December 22, the values of debt crisis in Europe and the depreciation of the ruble prompted investors to flee in local currency debt. The government sold 29.4 billion rubles, or 83 percent of the 35.5 billion rubles of bonds offered at auction Nov. 24.

Russia every year inflation rate rose for the fourth month in November to 8.1 percent, the highest since December 2009. Central Bank of Russia has a "free hand" to start raising borrowing costs, the Bank first vice president Alexei Ulyukayev rossii told a conference in Munich on 29 November.