Yesterday, the OFZ market took another material step back, hammered by increased volatility on the FX market. At the opening, the curve saw heavy pressure, with the long bonds slipping 2.1pp and the belly tenors losing 1.2pp, price-wise. By the close, the market had managed to step from morning lows, but still the curve shifted up another 30-50bp in yields. The long end fell 1.3-1.7pp in price, crossing the 12.0% level, while mid-term bonds sagged 1.2-1.6pp in price, approaching 12.40%.
We think the time has come to revisit relative valuations in the OFZ market as the bullet curve has crossed the 12% yield level. Given that holding OFZs has once again become a carry positive operation, we think that it adds incentive for local banks to increase the sovereign bond portfolio. At the same time, the level of RUONIA implied in floaters has hit its highest point this year, while the inflation break-even surged to 8.6%, which is higher than historical trend inflation in Russia of 7-8%. Therefore, we think that bullet OFZs now look more attractive than RUONIA floaters and CPI-linkers. On the other hand, we still recommend being defensive over DV01 risk, since the sentiment in the OFZ market is correlated with FX spot volatility, while inflation risks are certainly skewed to the upside.