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. Last Updated: 07/27/2016

T-Bill Rally Squashed by Profit-Takers

A spate of profit-taking halted a four-day rally on Russia's treasury-bill market Tuesday after yields hit a two-week low, but analysts predicted prices would stabilize over the next few days.

The average weighted yield for benchmark nine-month to one-year T-bills dropped to 36.24 percent from 40.44 percent a week ago, down almost 10 percent from its peak of 45 percent on Jan. 30.

Dealers said the market was slightly overheated Monday when average yields on benchmark issues fell sharply from 38.73 percent to 35.91, which led to profit-taking.

"The market is stabilizing at current levels," said Lina Yeryomina, a fixed income analyst at MFK-Renaissance. She said a 36 percent yield had prompted investors to sell.

Analysts attributed last week's rise to inflows of about $1 billion in foreign money as investors reacted positively to the Central Bank's decision to raise its refinancing rate to 42 percent from 28 percent.

"Russian banks themselves couldn't lift the market so high," said Alexander Romashov, a T-bills dealer at ING Bank. "It was started by foreigners, but I am not sure how long it will last."

Dealers said they expected to see strong demand when the Finance Ministry holds an auction Wednesday for nine-month paper and a three-year fixed coupon bond, which has failed to attract investors in recent weeks. "The expectation for the auction is not the same [as it was last week]," Romashov said. "A big premium is not expected. We could see very big demand tomorrow."

He said demand would be strongest for the nine-month issue, which, with the current ruble yield of about 36 percent, has allowed nonresidents to fix a dollar return of 20 percent to 22 percent using forward contracts.

Despite signs that confidence is returning to the market, some Western analysts have said Russia may have a hard time adhering to its budget with an estimated $5 billion worth of T-bill redemptions due every month. A senior Finance Ministry official, however, dismissed such concerns, saying the redemptions are being covered partly by budget funds set aside for debt servicing and partly through new issues.

"We are doing it with minimum tension for the budget," said Valentina Pryanichnikova, head of the Finance Ministry's T-bill department.

She said the Finance Ministry withdrew 488 million rubles ($8 million) from the budget in January to retire 25 billion rubles worth of T-bills. She said yields should come down in May, which would allow the government to begin borrowing for budget purposes again.