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Local sovereign debt: stronger in the morning; flat by the end

The OFZ market opened on a solid footing yesterday as the whole curve moved down near 10bp in yield. However, toward the end of the session, OFZs pared most of the earlier gains. The longest RFLB 28 (YTM 9.60%) ended 15bp higher in price, which marked a decline of just 3bp in yield terms. Meanwhile, bonds on the belly closed almost unchanged in price, while the front end widened 2bp. Perhaps, one of the reasons behind the selling pressure in the second half of the session was the publication of the draft budget for 2015-17. In particular, it assumes federal deficits of RUB 431bn in 2015, RUB 478bn in 2016 and RUB 544.4bn in 2017. Meanwhile, the government plans to finance the gap with proceeds from privatisation and borrowings in the local and international markets. In particular, we estimate that it would require near RUB 143bn of net domestic issuance next year. Given that so far this year net issuance is running at just RUB 40bn, the plans look sizeable from the perspective of pressure from new supply. At the same time, we believe that the Ministry of Finance would be able to borrow the needed amount, but at higher rates than now. Simultaneously, MinFin has acknowledged that funding sources are providing less than planned, so the government is ready to tap the Reserve Fund and bring its size down RUB 1.3tn in next three years.
Maxim Korovin, Anton Nikitin
VTB Capital analyst

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