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Local sovereign debt: failed auctions


Yesterday, the Ministry of Finance did not sell a single paper of the offered bonds. To recap, there were RFLB 19 and RFLB 23 on offer for RUB 10bn each. At the beginning of April, MinFin sold exactly these notes for a total volume of RUB 7.0bn at yields of 8.61% and 8.94%, respectively. Yesterday morning, RFLB 19 was quoted at an 8.71% yield and RFLB 23 at 9.11%. Potentially, market participants requested a 5-10bp premium to the secondary market, rejected by the Ministry. Thus, it appears that MinFin’s red line on yields lies a bit lower. Overall, the market reaction to the auction news was predictably negative: after the headlines hit the wires, OFZ prices slipped 15-30bp along the whole curve. And since the beginning of the week, OFZs have lost 60-80bp, price-wise, on the long end with RFLB 28 now trading around 9.20%. On the belly, bonds slipped 50bp in price terms. Hence, yields picked up 15bp on the belly and long end, while front end rates moved up just 5bp.

Before that, in March, MinFin had not borrowed a penny in the market. At the same time, it conducted a RUB 100bn sale of government saving obligations (GSO) in 1Q14. Without the GSO placement, net issuance would have been deeply negative. However, we estimate that MinFin does not have any urgent need to borrow right now, thanks to the increased oil and gas revenues combined with a healthy cash pile on banks’ deposits and fairly light maturity profile.

We estimate that the surplus of the consolidated budget in 1Q14 was the largest in last three years, at near RUB 890bn.

In addition, the Treasury now has RUB 480bn on banks’ deposits, which is RUB 205bn higher than in April last year.

The next redemption of local debt is only to take place in August (RUB 45bn), so there is no imminent refinancing risk.

Thus, the lack of new issuance is not disturbing the day to day operations of the government. In future, MinFin would be more concerned about local borrowing, given the fragile appetite for Russian risk in the international markets and vague prospects for privatisation. In addition, the performance of non-oil & gas revenues is set to deteriorate with the economy slowing down (i.e. MinFin expects negative GDP growth in 2Q14). Consequently, it is likely that MinFin will become more willing to accept the yield levels in the secondary market in 2H14.

Maxim Korovin, Anton Nikitin
VTB Capital analyst


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