Yesterday, the Ministry of Finance announced that it would offer RUB 15bn of RFLB 19 6.70 and RUB 10bn of RUOANIA-linked notes maturing in 2025. We highlight that floaters have recently been in great demand, but historically market participants were reluctant to buy the 10-year floater, given the lack of a liquid RUONIA swap market and the vague outlook for monetary policy on such a long horizon. Thus, the past two auctions for RUONIA-linked RFLB 25 saw subdued demand, which we think might well repeat today. In contrast, we expect decent demand for the mid-term RFLB 19, since we see room for the curve to steepen further.
Meanwhile, yesterday the OFZ market recorded yet another session in the black. The curve moved down 3-4bp on the long end and 10-15bp in the belly and front end. In particular, we highlight that RFLB 28 (YTM 10.55%) ended the day 0.3pp higher, price-wise, while RFLB 19 6.80 (YTM 10.70%) moved up 0.7pp. Subsequently, the 2s10s OFZ spread narrowed 20bp to -9bp. As we have argued before, we think there is more room for further curve steepening.
Specifically, we highlight that 10-year OFZs historically traded with an average spread to the CBR’s key rate of 180-200bp. Pencilling that spread into the current market yields, the medium-term expectations for the key rate are at 8.5%, which is reasonable bearing in mind the CBR’s inflation projections. Hence, we think there is almost no room left for further tightening in the long end. On the other hand, mid-term bonds traded with an average spread of 120-140bp vs. the key rate, which implies a further 100-150bp potential for yields to go lower in the belly, we think.