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Local sovereign curve: flattening underway as front end slips

Yesterday, OFZs saw some selling pressure in the short-term bonds. In particular, RFL B15 7.00 (YTM 6.59%) lost 15-20bp in price, and RFLB 16 7.35 (YTM 6.89%) declined 15bp price-wise as well. Market participants are probably concerned that after the failed auctions of long-term papers earlier this week, the Ministry of Finance is going to shift new supply on to the belly and front end, which would be a logical step, in our view. Meanwhile, longer dated bonds closed mostly unchanged in price yesterday, so the curve has naturally flattened, with the 2s10s spread down to 132bp (-8bp). At the same time, we highlight that front end bonds now trade at near a 200bp spread to the CBR’s key benchmark rate, which looks quite interesting on an historical perspective (25bp is a local minimum and 275bp the maximum). Therefore, we think local banks would show a strong bid for mid-term bonds in the primary market (if MinFin decided to come up with such offer). To recap, MinFin has RUB 80bn for 3-5-year notes reserved in the pipeline for 1Q14.
Maxim Korovin, Anton Nikitin
VTB Capital analyst


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