OREANDA-NEWS. September 30, 2011. The Ministry of Finance cancelled today’s OFZ 25079 auction, which is unsurprising in light of the extremely high yields on the sovereign curve. We do not expect MinFin to return to the primary market until global markets achieve a semblance of calm. Over the past week, OFZ prices have plummeted 3-5%, with yields gaining 80-100 bpts. We still advise against any aggressive buying in OFZs but do anticipate a spread increase between short- and long-term OFZs as the curve shape normalises.

Observations and Recommendations

The spread between short- and long-term OFZs is now narrow while the NDF/CCS curve is flat. If there is local stabilisation and RUB strengthening we should see short-term NDF implied yields falling and the spread between one- and four-year duration OFZs up. As a spread strategy we suggest going long 25072s and short 25077s with a 3:1 ratio. Spread deals for volume can be concluded in the spot market but are also available in the futures market: sell OFZ4 and buy OFZ2. The spread between 25077s and 25072s is hovering around 100 bpts vs 150-170 bpts in calmer times.