Local sovereign debt: more curve flattening
On Friday, longer OFZs remained well bid, with RFLB 28 (YTM 8.24%), RFLB 27 (YTM 8.11%) and RFLB 21 7.60 (YTM 7.86%) gaining 25-35bp price wise. Thus, we estimate the 2s10s spread in OFZs has tightened 4bp to 114bp. Meanwhile, the spread between 15- and 10-year OFZ rates has dropped to 15-17bp, a level not since May 2013. We therefore believe that taking some profits on the longest end and switching into the belly looks appropriate. In particular, we like RFLB 20 6.40 (YTM 7.84%), as the bond offers the widest spread to the CCS swap curve and the best roll-down opportunities on a three-six month horizon. Also, in our view, the bond is 40-50bp undervalued relative to the existing curve. The main risk for this trade is new supply, as RFLB 20 6.40 is one of the few being 'on-the-run' and MinFin would clearly opt to tap the market this week.
Maxim Korovin, Anton Nikitin
VTB Capital analyst
Back to the list