Fixed Income - Finance Ministry Aims to Lower Share of Floating-Rate OFZs

Today, Deputy Finance Minister Timur Maksimov offered some comments on the OFZ market in an interview with Bloomberg. His main points and our takeaways are below.> First, the Finance Ministry sees no need to fulfill the borrowing plan for the second quarter. In our view, this is in line with the Finance Ministry's previous comments.> Second, Russia is in the process of developing a mechanism to buy back OFZs in order to lower the share of floating-rate papers to less than 15-20% of the total market. Maksimov said the ministry is considering two options: via "inertia," by simply stopping the issuance of floaters to restore the portfolio structure, and a more "active" option involving buybacks from the open market. The aim of these operations would be to restore the structure of the portfolio to again allow public debt to be used to conduct an active macroeconomic policy in the event of any future crisis.> We consider the takeaways from Maksimov's comments for OFZs to be mixed. It is positive that the ministry has said there is no need to execute the 2Q21 borrowing plan in full. The current target for the quarter stands at R1 trln, and the ministry has so far borrowed R577 bln. Regarding Maksimov's remarks on floaters, the ministry has already been working on reducing the share of such instruments in the portfolio (now around 30%), as there has been no new supply of floaters since 4Q20. That said, the potential buyback of floaters is a new idea. We do not think buying back floaters would place any pressure on the fixed-coupon curve in the secondary market per se. In terms of sentiment, the comments demonstrate how averse the ministry remains to issuing new floaters at this juncture. Given this, we think the ministry is unlikely to consider returning to the market with floaters soon, even if global yields continue to rise. In addition, we think it is unlikely to drive yield premiums at its fixed-coupon auctions significantly lower than recently observed levels if conditions in the global bond markets remain unchanged.