(Bloomberg) -- Foreign investors lured by interest rates among the highest in emerging markets poured $2.8 billion into Russia's local-currency debt in March, the most on record.

Most of the inflow came in the second half of the month after the U.S. Federal Reserve laid out an unexpectedly dovish rate-hike outlook, Russia's central bank said in a report on Wednesday. The strong demand means there's little risk of substantial ruble weakening, even after the currency's 8.7% surge this year, it said.

The Fed's tone reignited the so-called carry trade for investors who borrow where interest rates are low to invest in high-yielding currencies. Demand for the bonds, also known as OFZs, hasn't abated in April and the Finance Ministry sold all $701.5 million of 2019 and 2033 notes tendered on Wednesday as investors bid for more than three times the securities on offer.

Bid-to-cover ratios in the auctions were "unexpectedly high," said Richard Segal, a London-based analyst at Manulife Asset Management. The central bank's statement is "a good hint that foreign investors drove much of the auction demand," he said.

While public finances have stabilized with a rebound in oil prices, Russia is increasing domestic borrowing more than fourfold from last year as it cuts back on using its sovereign wealth funds to finance the budget shortfall and looks to balance the books by 2020. The inflows are a sign investors trust the government's policies, Finance Minister Anton Siluanov said in Moscow on Thursday.

Russia's benchmark February 2027 ruble bond climbed for a second day on Thursday, trimming the yield to 7.89%. That was three basis points off a more than three-year low reached on April 6, data compiled by Bloomberg show.


Man Group, the world's largest publicly traded hedge fund, BNP Paribas Investment Partners and JPMorgan Chase's private banking division all said last month they had turned bullish on emerging-market local-currency bonds. A BlackRock ETF that tracks local debt of developing nations had its biggest weekly inflow on record in the second half of March.

While Wednesday's auction underscores "ongoing favorable investor sentiment" towards Russia, many investors are now shifting their focus to yields on offer in Turkey, according to Stephan Imre, an analyst at Raiffeisen Bank International AG. Yields on Turkish 10-year local-currency bonds have dropped 29 basis points to 10.82% since President Recep Tayyip Erdogan's referendum win on Sunday was seen ushering in a period of greater predictability.

"The relative position of the Russian bond market versus Turkey was weakening somewhat most recently," Imre said in an emailed note on Thursday. "For the short-term horizon we would continue to expect some modest correction in the ruble exchange rate versus the dollar, which should also lift OFZ yields."

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