The Central Bank of Russia’s efforts to curb inflation through elevated key interest rates have created a unique environment where bonds offer the highest positive real yields in over a decade. This period is marked not only by exceptionally high nominal ruble rates but also by extraordinary real yields, which are adjusted for inflation.
Understanding Real Bond Yields
Real yield represents the return on an investment after accounting for inflation. While typically calculated using current inflation figures, real yields also depend on future inflation, which affects investors holding bonds to maturity. This distinction is critical, as investors ultimately contend with the inflation rate during the holding period, not the past rate.
In a retrospective analysis conducted in June 2024, the annual yields of one-year OFZs (Russian government bonds) and annual inflation rates (as reported by Rosstat) were examined from 2014 to 2023. To assess actual investor returns, OFZ yields were shifted back 12 months to match the date of bond purchase.
Historical Trends in Real Yields
- March 2022: The highest real yield in the past decade, approximately 10%, was achieved by purchasing one-year OFZs in March 2022. This was driven by the Central Bank’s emergency rate hike to 20% amid geopolitical instability, followed by significantly lower inflation by spring 2023.
- COVID-19 Period (2020-2021): The opposite scenario unfolded during the pandemic. Low nominal yields coupled with rising inflation led to negative real returns for short-term bondholders.
Current Environment and Prospective Real Yields
Looking forward, the question arises: what real returns can investors expect if they purchase one-year OFZs today? Using inflation expectations rather than historical rates provides insight into future real yields.
According to November 2024 data, median inflation expectations for the next 12 months among Russian consumers stand at 13.4%. Despite being the highest in 2024, this figure suggests that real yields on one-year OFZs remain near their 10-year peak due to the Central Bank’s elevated key rate.
Real Yields Adjusted for Inflation Expectations
The real yield on one-year OFZs, accounting for consumer inflation expectations, currently exceeds 8 percentage points. This is a significant anomaly compared to the 10-year average, where the real yield typically hovered at negative 3 percentage points. This sharp divergence underscores the extraordinary circumstances in Russia’s bond market today.
Caution Regarding Inflation Expectations
It’s worth noting that consumer inflation expectations often exceed official inflation figures. This discrepancy stems from cognitive biases: individuals tend to notice price increases more than stable or declining prices, basing their perceptions on goods and services that have risen most noticeably in cost.
Despite this tendency, the fact that bond yields surpass even these elevated inflation expectations underscores the exceptional attractiveness of current fixed-income instruments. The combination of high nominal rates and controlled inflation offers a rare opportunity for investors seeking positive real returns.
The Russian bond market is experiencing an extraordinary period where real yields are at multi-year highs, driven by elevated nominal interest rates and inflation stabilization efforts. For investors, this environment provides an unparalleled opportunity to secure substantial real returns, even when accounting for heightened inflation expectations. As the Central Bank navigates its monetary policy, these conditions may continue to support the bond market’s appeal, particularly for short-term instruments like one-year OFZs.
