The OFZ market was well bid yesterday with interest coming from both local and internationals. At the end of the day, long end yields declined near 30bp, while the belly moved down around 50-55bp. Hence, the curve steepened further with 5s15s narrowing near 25bp to -125bp. Price wise, RFLB 28 (YTM 12.7%) gained near 1.5pp, while RFLB 19 6.70 (YTM 14.04%) advanced around the same. Today, MinFin is offering RUB 10bn of RFLB 17 with a coupon linked to RUONIA (same as last week).
Based on the current shape of the OFZ curve and level of NDF/XCCY swap rates, we estimate the fair price for the RFLB 17 at 95.5-96.5. We expect nice demand at auction, but perhaps MinFin will be conservative when setting the cut-off price. OFZs rallied recently, but the curve is still fairly flat. Compared to other EM markets, we think the 2s10s OFZ spread would have been closer to -50bp, given that CBR’s key rate is 15.0% (see Figure 1). In addition, we highlight that OFZ 10-year yield looks somewhat low against the inflation expectation or the latter is declining thanks to the rebound in the FX spot market. However, we think MinFim’s strategy to shift the new supply on the front end and the belly of the curve might prevent the curve steepening in the near-term. However, the borrowing plan is likely to see a marked revision owing to the new budget draft (expected in February).