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Local sovereign bonds: normalising spreads to repo

Yesterday, sovereign yields opened 13-14bp lower, but then optimism disappeared and the yields closed only 3-6bp tighter. RFLB May-19 closed at 8.89% and RFLB 28 at 9.09%. Considering that the CBR has already hiked policy rates 200bp, the yield curve should look flatter, the spreads to repo at 150-160bp in 10-15-year notes look close to their fair values and do not look too mispriced relative to the historical average (ca. 200bp). The primary market supply considerations are favouring slightly tighter spreads because YTD gross issuance is RUB 130bn and we estimate that the Ministry of Finance needs about RUB 200-250bn to satisfy budget needs (without a transfer into the Reserve fund). Thus, we believe auction volumes are highly dependent on the market environment and the curve could narrow again if the political environment improves.
Maxim Korovin, Anton Nikitin
VTB Capital analyst


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