OFZ Auction Results - June 9, 2021. Stronger than Expected 10y Auction

At the last OFZ auctions before new US restrictions on the primary market come into force on June 14, the main highlight was that the 10y nominal turned out surprisingly well-bid. Overall, the Finance Ministry raised R82 bln, almost double its weekly borrowing needs for the remainder of the year. The strong results for the 10y auction came despite the recent surprise in May monthly inflation and the risk of a hawkish message at Friday's CBR meeting (see our preview). Our take is that market participants see the potential scenario of front-loaded CBR hikes (which has become much more likely) as a positive factor, which could help to suppress the term premium of long-term OFZs, while at the same time still believing that the current uptick in inflation will subside by the year-end. In addition, both long-term US Treasury and EM local debt yields have been edging lower in recent days, which could have boosted the foreign bid this time around against the backdrop of low foreign holdings in the 10y issue. Overall, the auction results provide more evidence in support of our bear-flattening call (see our report). Meanwhile, the current pace at which the Finance Ministry is placing paper at auctions should allow it to retain high flexibility in the primary market moving forward.> The auction for the 10y nominal OFZ 26235 (March 2031) was very strong by recent standards and more successful than we had expected. Bids reached R148 bln, up from R83 bln at the previous auction for the same paper last week.There was R61 bln placed at a weighted-average yield of 7.38%, or just 1 bp above the secondary market level ahead of the auction (though up 4 bps relative to the time of yesterday's auction announcement). The tail was small, amounting to just 1 bp, with the cut-off at 7.39%. The structure of accepted bids suggests that demand was broad. There were 454 accepted bids (which is, to the best of our knowledge, one of the highest numbers in recent years), though the five biggest bids accounted for 60% of the entire allocation. The share of noncompetitive bids was relatively large at 34%. This could be an encouraging sign for long-term OFZs, in our view, as many participants proved willing to buy without a concession to the weighted-average price. > The auction for the 9y inflation-linked OFZ 52003 (July 2030) was also relatively strong. Demand amounted to R39 bln, in line with the May 19 auction, and the entire R20.9 bln residual in the issue was placed. The weighted-average yield was 2.75%, meaning a yield pickup of just 2 bps over the secondary market. Meanwhile, the cut-off was 2.76%. We believe some local accounts decided to pick up the bond due to Monday's surprisingly high May inflation print. We note that the bond's principal will be indexed by rather large increments in the coming months: 0.65% in June, 0.60% in July and 0.74% in August.