OFZ Auction Results - September 16, 2020

The remaining R115 bln of the floating-rate 5y OFZ 29014 (March 2026) was placed at an average discount margin of 50 bps. The paper has seen thin trading in the secondary market today, and the secondary premium to the market at the time of the auction was approximately 2 bps. Following today's placement, the discount margin should rise, as the paper is now off-the-run. The issue's price has not changed much since the previous auction two weeks ago. Meanwhile, the discount margin on another floater, the 4y OFZ 24021 (April 2024), has slid 6 bps since September 9, when the issue went off-the-run.In the nominal 7y OFZ 26232 (October 2027), R23 bln was placed, about half of the offered R43 bln, but without any yield premium to the secondary market. We believe the absence of a premium today, coupled with the high volume of floaters being placed, shows the Finance Ministry's willingness to keep the supply of nominal paper subdued. This should boost nominals and help their yields to fall, which could take place after the CBR rate decision on Friday. Now, R20 bln of the OFZ 26232 remains before its registered limit. We think it could be offered again in the next two weeks. The low volume placed suggests low nonresident demand for nominals. According to the CBR, nonresident participation (including the Russian subsidiaries of foreign banks) at floater auctions in August was around 15%; if we assume this share has remained the same in September, then nonresident purchases at today's floater auction would come to around R20 bln - comparable with the total volume placed in the nominal issue today. We think the nonresident floater purchases likely reflect high demand from subsidiaries of foreign banks rather than from foreign investors, with the former seeking to buy these liquid assets with almost zero interest rate risk in order to help meet liquidity requirements.In the third auction, R26 bln in the new, 10y CPI-linked 52003 (July 2030) was placed at a yield near 2.77%. Before the auction, there were only two linkers outstanding, the 3y OFZ 52001 (August 2023) and 7y OFZ 52002 (February 2028), which are yielding 1.61% and 2.56%, respectively. Given the steep slope of the curve, the spread of 20 bps between the new 10y and 7y CPI linkers seems normal. The last CPI linker auction was July 22; since then, the issue was barely traded. Given this low liquidity, and the fact that issuance of linkers has been low this whole year (the peak came in January, when R26 bln of the 7y OFZ 52002 was placed), we treat today's results as good for the initial placement. We believe that real rates in Russia will remain below 2%, so we expect the prices of the OFZ 52002 and the new OFZ 52003 to rise, reflecting the CBR's stance of keeping the real key rate low through 2022.The R164 bln placed today is below the R200 bln that would need to be placed on average every week until the end of the year in order for the Finance Ministry's plan of R4.4 trln in net borrowing this year to be met. On another hand, the ministry may use its R1.1 trln cash pile, in which case the average weekly placement volume would be R120 bln, meaning that theoretically the ministry may continue to place OFZs without providing premiums.