Yesterday, sovereign yields moved about 10bp wider on the back of the weak performance by RUB. RFLB May-21 (series 26205) closed near 9.76%, yield-wise, and RFLB 28 (series 26212) ended the day at 9.80%. The spread to the CBR repo widened to 180bp on the curve and it partially covers potential rate increases by the CBR.
Meanwhile, the Ministry of Finance announced that the borrowing plan for 2014 remained unchanged and the government expected to borrow about RUB 230bn by the year-end. Considering the fact that YTD gross borrowings in the market are only RUB 130bn, this is quite a large volume for the market at the end of the year. The average weekly borrowing volume is to be RUB 15-20bn vs. less than RUB 10bn so far. Moreover, we highlighted a few times that the spreads to the CBR repo are below the historical average at the moment due to the lack of primary market supply. So, the yields must adjust accordingly to at least 200bp above the CBR repo rate in the current market conditions. The immediate market reaction was muted, because many market participants consider that the federal budget is in good shape and the borrowing plan is to remain virtual. Our models suggest the same and RUB 230bn through the year-end implies that MinFin is to channel about RUB 150bn into the Reserve Fund. Thus, MinFin is unlikely to rush to borrow at any yields, or push market yields upwards.