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Local government bonds: yield curve flattened as rate-cut plays were reduced

On Friday, the local sovereign yield curve flattened with long-term yields tightening 3-4bp and the yields in the belly down 2bp. RFLB 17 7.4 (maturing in April) closed at 6.82%. RFLB 27 closed at 7.99%. We note again that the market is well-bid in RFLB 27 and 28 once the bond yields move well above 8%. Overall, the curve flattened substantially, with the spread between RFLB 27 and RFLB 17 7.4 falling from the peak at 145bp to around 120bp over the course of the last two weeks. In our view, this move was justified by international players reducing their positions in the belly of the curve while their presence in the long-end is quite limited. Furthermore, it seems that the reduction of the positions might have been driven by a reassessment of rate cut expectations. Nevertheless, the yield curve shape looks more normal to us and we believe there is limited potential for further flattening, especially with shy foreign participation in the long end. Moreover, the market continues to expect heavy primary market supply in the long-end of the RFLB curve.
Maxim Korovin, Anton Nikitin
VTB Capital analyst


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