Bi-Weekly FICC Strategy - July 29, 2021. Tailwinds for Long OFZs Should Persist

> Oil: Since early July, market sentiment has increasingly been driven by fears about the Delta variant's potential to wreak havoc on the economic recovery. However, oil market fundamentals remain very upbeat, with OPEC+ adding little supply. Moreover, major oil-consuming countries have either already achieved high vaccination rates or are making progress, suggesting a surge in hospitalizations and deaths will be avoided even as Delta cases rise.> Ruble: Despite cautious Fed rhetoric at the July meeting, we expect the dollar to appreciate globally if US macro data stays strong. However, the ruble should be supported by higher interest rates and thus could stay stable near 73.5. On the other hand, support from FX sales by exporters related to tax and dividend payments has come to an end. Meanwhile, August is just around the corner, which has often been an unlucky month for the ruble. Thus, a temporary depreciation to 75 could be in the cards. On the other hand, this would represent a good buying opportunity.> OFZs and ruble rates: The recent streak of strong auctions and solid market dynamics should attract more international attention toward the new, on-the-run OFZs, in which foreigners still seem to be underinvested relative to the old, off-the-run issues. The former offer generous yield premiums of 10-20 bps to the latter.> EM bonds: We expect the inflows into EM debt to continue and spreads to narrow. Over the next two weeks, if the US data shows strong jobs growth in July and still-high inflation, expectations could build for more hawkish rhetoric from the Fed during its annual symposium in Jackson Hole on August 26-28. With this in mind, we think the US 10y yield could recover from its current levels around 1.25% and move closer to 1.30% in the next couple of weeks. > FSU sovereign Eurobonds: Russia's dollar and euro sovereign curves both lagged the rally in core rates. Meanwhile, the geopolitical news flow remains favorable for Russia to outperform. In the rest of the space, we highlight the Belarus 23 and long-dated Armenian bonds.> FSU corporate and banking Eurobonds: Market activity has remained subdued, and quotes did not move much over the last two weeks, while spreads widened slightly given the downward shift in the dollar swap curve. We do not expect prices to change much over the next two weeks. > FSU primary Eurobond market: The primary deal pipeline for the autumn is starting to take shape: in Uzbekistan the NBU mandated banks for a new deal, while Russia's Petropavlovsk may tap the market to prefund a 2022 maturity after it secured bank financing.