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Local sovereign debt: recovery to slow down

On Friday, the OFZs market traded on a stronger footing, helped by the lack of new supply and relatively stable FX spot trading. At the end of the day, RFLB 28 (YTM 13.4%) gained 3.25pp, while bonds on the belly strengthened near 2.0-2.5pp price wise. As a result, the curve steepened further, with the 2s10s spread closing at -110bp, up from -130-140bp before. Overall, long OFZ yields tightened 80-85bp on Friday, while the belly declined 90-95bp and front end notes slipped near 100bp yield wise. Overall, we think at present valuations OFZs look fairly priced against the inflation expectations. We estimate that currently OFZs are trading on a basis of 10% average inflation over the next two years, which seems reasonable to us. Hence, we suppose that in the near term, unless the CBR cuts rates, OFZs would consolidate here.
Maxim Korovin, Tatiana Zueva
VTB Capital analyst


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