OFZ Auction Results - October 6, 2021. CPI-Linker Auction Went Well; the Correction in OFZs Looks Overdone

The Finance Ministry again adhered to a cautious approach at today's auction, offering only a CPI-linked issue and only a small amount. However, OFZ yields kept creeping higher along with swap rates and yields on other EM local debt. We believe the current weakness could persist for some time, as surging oil and gas prices have kept pushing inflation expectations higher, which has kept bond investors on edge. We also see a risk that weekly inflation in Russia will remain elevated for the next several weeks, until the impact of the one-off social payments made in early September fades. That said, we see ruble rates as too high from a fundamental standpoint, especially longer tenors. The swap market already prices in a long-term level for the key rate above 7.50%. Interestingly, this is far more conservative than what is in the CBR's "high global inflation" scenario, as outlined in its recent Monetary Policy Guidelines report. In that scenario, the CBR projects that the key rate will settle at around 6% in 2024, up from 7.5-8.5% in 2022 and 6.8-7.8% in 2023. Hence, we expect long-term rates to ease when the dust settles.> Today's auction went pretty well, as we expected. The full R10.1 bln offered in the 11y CPI-linked OFZ 52004 (March 2032) was placed at a cut-off yield of 3.09% in real terms, corresponding to a yield premium of 9 bps to the nearest-dated CPI-linker, the 9y issue due in July 2030. This premium looks rather modest to us given that this was the issue's debut auction. Demand totaled R28.9 bln.