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Local government bonds: relatively good appetite for RFLB market

The RFLB market demonstrated rather surprising dynamics, while RUB is on a downtrend. The yield curve flattened, with the belly moving 4-5bp wider and the long-end unchanged. At the same time, spreads to XCCY were hovering around all-time lows, i.e. 40bp in the 5-7-year segment and 20bp in the long end. This is unusual because the long end substantially underperformed other parts of the curve during the sell-off. Thus, we think that the recent dynamics are related to the lower participation of foreign investors in the long end vs. the belly and the continuing unwind of rate-cut plays in the belly. Moreover, local government bond yields dropped 40bp in the long end before the FOMC meeting last week, and increased only 10bp post-FOMC. The RUB bounce has already played back 50% of the appreciation in September. As such, compared with RUB, RFLBs seem to be well-bid and if the sell-off continues we might see them underperforming the market segment here. Also, we expect the Ministry of Finance to release its domestic borrowing plan for 4Q13 today.
Anton Nikitin, Maxim Korovin
VTB Capital analyst

bonds, ruble

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