OREANDA-NEWS. April 28, 2012. The Finance Ministry placed the OFZ 26280 issue (less than 19% of the offer amount, or RUB6.5bn) with a maturity. Demand totalled RUB9.7bn with the weighted average yield of 7.60% matching the higher end of guidance (7.55-7.60%) at a cut-off price of 99.73, reported the press-centre of ATON.

Observations and Recommendations
Interest was weak despite good external factors and continued rouble strengthening. We blame the absence of a premium to the secondary market: the pre-auction target range was lower than the yield on 26206 (with a comparable 4.3 year duration), which closed at 7.62%. Unconfirmed reports that the Euroclear settlements launch could be delayed may also have affected investor sentiment.

Given that most bonds with durations of 4 years or less trade at a discount to the sovereign yield curve and there is a potential supply overhang at the long end of the curve (according to the domestic borrowing programme), we could see the curve’s slope steepen. Also, the expected budget deficit contraction and a possible reallocation of bond supply from local to external markets (either by raising dollar borrowing limits or issuing rouble eurobonds) may ease pressures on LT OFZ rates. Until MinFin’s borrowing policy is clarified, 26206 looks best, thanks to its high liquidity and pivotal position on the OFZ curve (possible rotation point).