Deutsche Bank cuts Russian bonds forecast amid rising tensions

LONDON: Deutsche Bank on Monday cut its forecast for Russian government bond returns, saying the West's deteriorating relationship with Moscow was raising the risk of new sanctions.

The bank said in a new report that it remained "constructive" on Russian fixed income, but acknowledged the nervousness caused by the alleged poisoning of Russia opposition leader Alexei Navalny and the disputed election in Belarus.

"We see severe sanctions escalation as unlikely but the risks, including those of a long-term deterioration of the EU's relationship with Russia, should not be underestimated," Deutsche said.

It revised up its year-end forecast for the government's 10-year bonds yields to 5.75% from 4.75%.

That still implies a near 50 basis point rally for bonds from their current levels of around 6%, but the strains have been showing.

The rouble has slumped over 15% against the US dollar and rouble-denonominated bonds yields, which are a proxy of government borrowing costs, shot above 8% earlier in the year during the fright over COVID-19 and collapse in oil prices.

They have been climbing again lately, though the underperformance versus other major emerging markets countries' debt is not yet as bad as during the 2014 Crimea crisis or after the poisoning of a former spy in Britain in 2018.

Russia's reserves outweigh its debt, and the country has among the best reserve adequacy metrics around. In recent years however the central bank has been comfortable allowing the rouble to fall and act as a shock absorber.

"Putting it together, and we'd be cautious about fading recent underperformance in RUB until there is more clarity on the geopolitical outlook," Deutsche Bank's analysts said.