As a risk-on wave hit emerging markets, the RFLB market made the same gap as during previous bounces: dealers were caught either ‘short’ or ‘out-of-paper’ along the whole yield curve: the yield curve thus tightened 10-25bp at the long-end and its slope declined 10bp in five-15-year tenors. Moreover, those market players who expected to cover their shorts at the auctions were disappointed, because their volume was not enough to satisfy market needs, and both notes were placed below the initial yield guidance. The Ministry of Finance placed RUB 2.9bn of RFLB 18 6.2 at 6.73% (vs. the initial guidance of 6.85–6.90%) and RUB 11.6bn of RFLB 23 at 7.61% (vs. 7.63–7.68%). A good discount at the five-year auction is likely to have been the result of the low offering volume, and was triggered by a need to cover shorts. The five-year note closed flat to auction result. The ten-year note was fully taken, and its yield had fallen to 7.44% by the end of the day. Total aggregate demand for the auctions was RUB 142bn, and thus everything was placed in non-competitive bids, probably on a pro-rata basis.
For example, RFLB 27 closed at 7.68%, 22bp tighter from the previous day in yield terms. We believe the squeeze at the long-end is justified by a lack of primary supply over the course of the last two months. So far, nothing has been placed in the 15-year tenor by the ministry in 3Q13, and we see reason for a further squeeze in this segment if the EM rally continues (until the next auction, when MinFin might fill market demand). From a historical point of view, and considering the steeper UST curve, we believe that the slope in the five-15-year segment at around 100bp is fair.
Maxim Korovin, Anton Nikitin
VTB Capital analyst
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