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Local sovereign debt: rock solid – surprisingly

Friday’s OFZ market performance surprised us. The OFZ curve had priced in a 50bp rate hike at best, so we would have thought that the 150bp move would have produced a marked re-pricing. The initial reaction of the OFZs to the news was a 10-15bp jump in yields, but bids emerged here. As a result, in a matter of hours, OFZ price slippage was pared, at least by half. At the end of the day, the OFZ curve moved up only 7-9bp in the belly and long end, while front-end notes closed just 3-5bp higher in yield. In price terms, the longest RFLB 28 (YTM 10.04%) ended 0.5pp down in price, while in the belly price swings were contained to 0.1-0.2pp. Hence, OFZs now trade just near 50bp above the CBR’s key rate, which is tight in historical terms. We believe that the main reason behind Friday’s unusual price action was the tight liquidity in the market, as it has been undersupplied YTD. Subsequently, covering even modest shorts has become challenging.
Maxim Korovin, Tatyana Zueva
VTB Capital analyst


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