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Local sovereign debt: spread to the key rate narrows


Friday's session started rather quietly, with market participants on the side-lines ahead of the CBR's monetary decision, at which the regulator cut the key rate 50bp to 11.0%. That outcome was in line with the market consensus and had already been priced in, so the reaction in the market was rather muted. By the end of the day, long-term OFZs gained 0.3-0.4pp in price, with RFLB 28 closing at a yield of 10.65%. Bonds on the belly closed 0.2-0.3pp in the black, so the whole curve moved down 7-8bp, post-CBR, having basically ignored the mounting pressure on the FX market stemming from crude's downturn. Inflation-indexed bonds slipped 0.2pp on Friday, yet break-even inflation remained around 7.2%, we estimate. 

This morning, Brent is already trading 1.0% in the red, so OFZs are likely to open wider. We highlight that the spread between long OFZs and the CBR's key rate widened to -85bp on Friday (+45bp) thanks to the rate cut. Nevertheless, the carry is still negative and remains well out of normal historical ranges. Meanwhile, we note that there is no policy meeting in August and suppose that in September the CBR is likely to make a pause in the monetary easing cycle. Therefore, the combination of a negative carry and the sluggish performance of the crude oil market pave the way for a further correction in bullet OFZs, in our view. At the same time, carry on RUONIA-linked bonds remain in a positive range, which is likely to provide some support to them.

Maxim Korovin, Tatiana Zueva
VTB Capital analysts


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