OFZ Weekly Flows - August 23, 2021. August on Track to Exceed July's Inflows

The net inflow of internationals into OFZs accelerated to R87.4 bln in the week to August 20, the fastest pace since the last week of July. MTD cumulative inflows reached R138 bln. With one and a half weeks remaining in August, we think this month's inflow is on track to exceed the R170 bln recorded in July. Provided international appetite toward OFZs remains strong, the market should continue to outperform EM peers, as it did last week. Among nominals, we still believe the "new" issues represent the best value. > Last week, almost the entire inflow went into nominal issues maturing in 5-10 years, with R34 bln going into the 10y OFZ 26235 (March 2031). We believe the main trigger for these inflows was the recent streak of impressive primary market auctions. The OFZ 26235 caught special attention, as it had been somewhat overlooked by the international investor community (probably as it is not in the GBI-EM indexes): the foreign share in the issue stands at 35%, versus 42-56% in the nearest-dated bonds. The second most popular paper among internationals was the 6y OFZ 26207 (February 2027), which attracted R16 bln, followed by the 8y OFZ 26237 (March 2029), which saw R14 bln of inflows. To some extent, large international interest toward the middle of the curve could be due to the redemption of the OFZ 26217. Nonresidents held R18 bln in the issue, and some of them could have decided to reinvest the proceeds. > Other "new" OFZs were also well-bid. Some R9 bln moved into the 10y OFZ 26239 (July 2031), followed by R8 bln into the 15y OFZ 26240 (July 2036) and R1 bln into the 20y OFZ 26238 (May 2041). Foreign shares in each of the "new" OFZs continue to lag those in off-the-run nominals, which implies that there is still ample potential for their yield premiums to tighten. For instance, internationals hold 18% of the July 31s, 27% of the May 29s, 20% of the July 36s and only 10% of the May 41s. Taking into account the local subsidiaries of foreign banks, the respective shares are in the 17-32% range, according to the NSD. > The Finance Ministry held its fourth straight auction without limits last week. Following the auctions, at which it placed R126 bln in total, the Finance Ministry only needs to place another R732 bln gross this year (roughly R40 bln per week) to meet its annual goal, or R340 bln net taking into account today's R290 bln redemption. Thus, we do not see a significant risk for the market in terms of primary supply.> The overall international share in OFZs ticked down from 19.7% to 19.4% last week, given the hefty allocation at the auctions. The foreign share now stands at the same level as at the beginning of April, but still some 3 pp shy of the level at the start of the year.