Halister News

(Bloomberg) -- Bank of Russia favors selling bonds of up to 1-yr maturity with 3-mo. coupon, Alexander Polonsky, deputy head of monetary policy department of Bank of Russia, says in St. Petersburg.

• Bank of Russia bonds shouldn’t have same maturity as OFZs
• No final decision on Bank of Russia bonds’ parameters has been made
• Test bond sale may come in several months
• Key instrument during liquidity surplus period are deposit auctions, while it’s better to use bonds during significant surplus of above 1t rubles
• Russia may swing to liquidity surplus in end of Jan. 2017 if oil is at ~$40/bbl
• Currently banking system still has liquidity deficit
• During liquidity surplus Bank of Russia may hold 7-day repo auction but not at same time as deposit auction

--JOSHUA FINEMAN

(Bloomberg) -- Even after the Fed’s Dec. rate hike, swap spreads are “still meaningfully below zero” and spread-to-rate correlations are far off from returning to positive, especially since the “global reach for yield is still in force,” Nomura strategists led by George Goncalves write in note.

• Swap spreads “no longer the perfect tool” to protect fixed income portfolios in times of stress; “nor are they good signals that risk-off pressures are forming”
• Front-end spreads: proof of “new world” for spreads is fact that there was “no significant widening” of 2Y spreads during recent risk-off episode after Brexit
  • Also, better correlation between 2Y spreads and 2Y OIS/UST spreads, so 2014-2015 spread widening periods were a function of “strong demand for cash bonds” as a result of LCR requirements
  • Balance sheet availability has become “more precious,” leading to spikes in GC repo during quarter-end and times of stress, which may be putting tightening bias into Libor/GC spread and “transmitting into front-end swap spreads”
• Intermediate spreads: Since Fed hike expectations have been pushed back, an opening of an IG issuance window may play a role before “summer slowdown”
  • 5s10s spread curve around “most stretched levels” under a new regime and may be opportunity for steepening into summer
  • Don’t rule out possibility that foreign central banks come under pressure and start defending their currencies via UST selling, which exacerbates spread tightening
  • Belly spreads “more at risk,” since the last round of EM FX-based selling impacted front-end paper and the next “overweight” bucket for central banks is 3-7yr sector
• Long-end spreads: “Key structural factor” impacting 30Y spreads is that private defined benefit pensions have become risk averse, shifted to receiving swaps for conservative strategies
  • May be challenging for funds to reallocate to stocks and/or take off received swaps positions, as their “worsening funding status” may lead them to “more prudent investment strategies” for liability management
  • Funds may be comfortable holding onto existing swap receiver positions, though “real risk” is that there’s a skew for further tightening if “another shock hits the market”

--MARCO BERTACCHE

(Bloomberg) -- EUR 30y10y vs 40y10y spread has been very stable for month and the cheap 40y point on the curve is finally normalizing, BNP Paribas strategist Eric Oynoyan writes in client note.

• Forward spread is moving toward target, move stop higher to -25bps and still expect move above -15bps