OFZ Auction Results - December 23, 2020

The Finance Ministry today placed in full R10.1 bln in the CPI-linked OFZ 52003 (July 2030) at 2.48% with no premium to the secondary market. Demand was not as high as last week, when bids for the same paper were R113 bln versus R34 bln today. It appears that the market is somewhat devoid of buyers with the approach of the holidays.This was the last auction of the year. The next one is likely to take place on January 13, as the first working day of the year for Russia will be January 11.In early December, Finance Ministry officials said the ministry would be proactive when placing OFZs next year to give itself some breathing room. If the targeted volume of R3.68 trln is placed evenly throughout the year, each quarter should see R0.9 trln of issuance. However, the ministry has said it intends to frontload the issuance to the beginning of the year, so we expect it to place around a third of the annual targeted volume (R1.2 trln) in 1Q21.Given that the share of floaters is already high at around 35%, we think the ministry is likely to accelerate the placement of inflation linkers in the event of low demand for nominal OFZs; inflation linkers currently account for only 4% of the OFZs in circulation. If the ministry looks to increase this share to 10% next year, it could end up placing around R1.08 trln in these securities. We do not think the ministry would be able to place such a large volume of CPI linkers in the event of low demand for nominal OFZs (unlike this year, when it successfully replaced nominal OFZ issuance with floaters). We expect the current inflation spike to prove short-lived and inflation to slow rapidly by the end of 1Q21, with demand for CPI linkers declining in tandem.