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Local sovereign debt: back above 13%

On Friday, the OFZ curve widened 40-50bp at the long end, and 65-75bp in the belly. Hence, medium-term bonds closed near 13.2-13.5% in yield terms, while RFLB 28 ended at a yield of 12.67%. Price wise, the longest notes lost near 2.0pp, while bonds on the belly slipped some 2.5pp. Therefore, the 2s10s spread widened to the fresh lows of 60bp. Compared with the other EM local sovereign debt markets, the OFZ curve offers one of the highest nominal and real yields now. Overall, Russia now trades close to Brazil as a nominal benchmark. Yet, we highlight that the OFZ curve is the most inverted one among EM peer markets. Two other markets with expectations skewed toward a hawkish monetary policy stance are Turkey and Brazil, which have 2s10s spreads on the local sovereign debt curve close to zero or just slightly negative. On that scale, rate hike expectations in Russia are strongest now, which is also well illustrated by the historically wide spread of short-term OFZs to the CBR's key rate. Hence, the spread of 3-year OFZs trades near 250bp vs. the key rate, while the historical average is no higher than 150bp. Meanwhile, market participants could also be pricing in a non-conventional rate hike, such as further limitation of outright liquidity provision.
Maxim Korovin, Tatyana Zueva
VTB Capital analyst


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