The long-playing idea of shortening duration and subsequent curve steepening has capitulated as market players started to reduce their positions in the yield curve belly. As such, RFLB Feb 19 widened to 7.33% (+4bp) and RFLB Dec 19 widened to 7.51% (+5bp). Meanwhile, RFLB 28 was virtually unchanged at 8.21%.
Today, the Ministry of Finance is offering RUB 10bn in 5-year note (RFLB May 19) and RUB 10bn in 10-year note (RFLB Aug 23). We think that MinFin is cautiously not offering 15-year notes due to the weak market conditions. At the last auction, MinFin did not offer a premium and this time it is unlikely to offer more than 2-3bp above the secondary. At the same time, the market is likely to continue testing the new auction mechanism and could put a lot of ‘white noise’ or greedy and cheap quotes, testing where the premium tolerance is (thus, demand might be somewhat inflated). So, we do not believe that the volume of satisfied (i.e. real) demand will be significant, although total demand could exceed RUB 5-7bn in each auction.
At the same time, MinFin has announced a change in technicals and raised the maximum share of non-competitive bids to 90% (from 25% previously). Hence, competitive bids are likely to account for at least 10% of bidding volumes. Previously, investors had to put competitive bids above the yield guidance in order to be able to bid at the weighted average non-compete price. Thus, post-auction, the demand inside the guidance was announced. As there is no guidance, the demand figure could have been inflated if this technical change was not made.