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Local sovereign debt: flattening underway

As we have suggested, Friday’s rate hike produced some flattening on the OFZ curve yesterday. Hence, bonds on the belly lost 50bp on average with yields widening 20-30bp. In particular, RFLB 18 6.20 ended at 9.25%. Front end notes were also better offered, with yields climbing 15bp higher. In contrast, the long end was well bid, with prices up near 25bp on average; in particular, RFLB 28 closed at a yield of 9.65%. We think yesterday’s price action was driven more by the short covering in the absence of new supply from the Ministry of Finance. Nevertheless, the OFZ curve flattened visibly, with the 2s10s spread tightening near 35bp to 75bp. However, we draw attention to the flattening between the belly and longer-dated bonds; in particular, the 5s15s spread now stands at only 20bp, close to the lows since 2012. In that regards, we recommend selling long end bonds against the belly and/or buying belly and hedging it with a short position in OFZ futures (if liquidity allows). In addition, we think the belly is the only point that could draw potentially the bid from local banks: the spread to the CBR’s cost of repo is okayish by historical means, while the spread to the XCCY curve at 50-60bp is also not bad compared with the deeply negative numbers on the front end.
Maxim Korovin, Anton Nikitin
VTB Capital analyst


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