Russia sold more bonds than it offered for the first time ever, accepting the highest yield in six months, as the prospect of rising interest rates increases the cost of financing its budget deficit.

The Finance Ministry sold 6.5 billion rubles ($209 million) of notes due in August 2012 yesterday, more than the 5.9 billion rubles planned, at a yield of 6.1 percent, the highest since June 2, according to data compiled by Bloomberg. The government also issued 10.4 billion rubles of the so-called OFZs due in July 2015 at a yield of 7.26 percent, the highest end of guidance issued on Dec. 7.

Inflation that the government expects to exceed its 8 percent target this year is starting to “worry” the central bank, Bank Rossii Chairman Sergei Ignatiev said yesterday. Traders expect record-low benchmark rates to climb by half a percentage point from as low as 2.5 percent during the next three months, according to forward-rate agreements, after 14 cuts between April 2009 and May this year.

“With monetary tightening on the horizon in the first quarter and higher inflation they have to offer a higher premium,” Dmitry Gourov, an emerging-markets strategist at UniCredit SpA, said by phone from Vienna yesterday. “OFZs will become an even better buy next year when rates go higher.”

Brazil offered investors a yield of 12.208 percent on its domestic bonds due in January 2015 last week, 2 basis points from the highest rate since the securities were first sold in September, according to data compiled by Bloomberg. Yields on the South American country’s bonds in reais due in January 2014 yield 12.312 percent, up from 11.373 percent when they were last offered in August, the data show.

Brazilian Rates

Traders in the interest-rate futures market are betting Brazil will raise its benchmark rate by at least 25 basis points, or 0.25 percentage point, to 11 percent in January, data compiled by Bloomberg show. The central bank held the benchmark rate at 10.75 percent yesterday. Consumer prices rose 5.63 percent in November from a year earlier, the highest level 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 the 839 billion rubles targeted for 2010, based on central bank data.

“The Finance Ministry has a big bag of debt it still hasn’t placed and that’s the reason they sold more this week,” Konstantin Kostrub, the head of fixed-income trading at ING Groep NV, said by phone from Moscow yesterday. The auction marked the first time the government sold more debt than scheduled, he said.

Spending Reserves

The government has tapped its Reserve Fund, one of two sovereign wealth funds, to finance the country’s second budget deficit since 1999. That fund dropped 33 percent this year to $40.9 billion. The government plans to spend $20 billion from the fund in December and $10 billion next year, Deputy Finance Minister Dmitry Pankin said at a conference in London on Nov. 30.

“Ideally the government would not have to use the Reserve Fund,” Kostrub said. “It’s in the Finance Ministry’s interest to place at such levels,” he said, referring to yesterday’s increased sale of OFZs.

The ruble weakened 0.3 percent to 31.0775 per dollar yesterday, its biggest drop this month. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest rate differentials and allow companies to hedge against currency movements, show the ruble at 31.3806 per dollar in three months.

Extra Yield

Russia’s dollar bonds due in 2020 fell, pushing the yield 2 basis points higher to 4.830 percent, the highest since Dec. 3. The price of country’s ruble notes due August 2016 declined, leaving the yield 3 basis points higher at 7.31 percent.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries rose 3 basis points to 197, according to JPMorgan EMBI+ Indexes. The so-called spread compares with 138 for debt of similarly rated Mexico and 160 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

The spread on Russian bonds is 32 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan Indexes.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was little changed at 144 yesterday, down from this year’s peak of 217, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Overnight Rates

Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade rating, cost 15 basis points more than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.

Overnight interbank rates on ruble deposits surged to 5 percent on Nov. 30, the highest level since Jan. 25. MosPrime, the average rate Russian banks charge to lend money to each other overnight, hit an 11-month high of 4.78 percent last week. Ruonia, the average rate 31 banks charge to lend rubles to one another, reached 4.43 percent, the highest since March 30.

The Finance Ministry said Nov. 23 it delayed a Dec. 1 auction to sell 15.2 billion rubles of November 2014 bonds and 10.5 billion rubles of June 2011 securities until Dec. 22 as Europe’s debt crisis and the weakening ruble spurred investors to shun local-currency debt. The government sold 29.4 billion rubles, or 83 percent of the 35.5 billion rubles of bonds it offered in a Nov. 24 auction.

Russia’s year-on-year inflation rate rose for a fourth month in November, to 8.1 percent, the highest level since December 2009. Russia’s central bank has a “free hand” to start raising borrowing costs, Bank Rossii First Deputy Chairman Alexei Ulyukayev told a conference in Munich on Nov. 29.

Bloomberg