OFZ Weekly Flows - August 24, 2020

The outflow of nonresident investments in OFZs accelerated early last week amid fears of an escalation in the situation in Belarus. It was foreigners that accounted for most of the offers early last week, though there were not that many transactions due to the traditional summer lull in the market. Buying activity began to rise during the middle of the week thanks to the more attractive price levels and the cancellation of the Finance Ministry's OFZ auctions, though this only began to show up in Friday's data since nonresidents primarily opt for T+1 or Т+2 settlement. For this same reason, we do not expect the likely outflow of nonresident money connected with the mounting of political risks late last week to show up until this week. Taking this into account, we believe the National Settlement Depository's data will show an outflow early this week similar in scale to the one seen over all of last week. > Last week saw a net outflow of R4 bln of nonresident investments from the OFZ market. There was a R7.4 bln outflow of foreign money over the first four days of last week, followed by a R3.4 bln inflow on Friday. Given the increase in risk-off sentiment, we think at least a third of the trading volume last week was attributable to nonresident outflows. After an extended period of foreign investors shifting their exposure from the short end to the middle of the curve (this began in late July), this trend reversed last week, as foreigners seem to have been selling long- and medium-dated paper. Hence, the issues that saw the biggest net outflows of nonresident investment were the 6y OFZ 26226 (R7.5 bln) and 14 y OFZ 26225 (R4.3 bln), while the biggest inflows were in the 4y OFZ 26227 (R4.4 bln) and 5y OFZ 26234 (R6.9 bln).> The share of nonresidents remained flat at around 28.5%. This is what he had expected given the Finance Ministry's recent cancellation of auctions (see last week's OFZ Weekly Flows, and keep in mind that we calculate the market volume based on the nominal value of inflation-linked notes at the end of each day). Since market volatility remains high, we think it likely that the ministry will either cancel its auctions for a third straight week on Wednesday or simply limit its offering to floaters, which typically find most of their demand from local banks. Considering that the Finance Ministry typically offers up CPI-linkers once a month and last placed them on July 22, one might expect them to be on offer at this week's auction, the last of the month. If this is the case, we assume the issue offered would be the OFZ 52003 (July 2030), which has yet to be auctioned off. However, we think the Finance Ministry will opt to break the pattern and refrain from placing CPI-linked notes on Wednesday. We still think that issuance will not recover to a more sustainable level (R50-80 bln per week) until September, when bank demand should begin to pick up as deposit rates catch up to the decline in the key rate. The average daily trading volume in the OFZ market recovered to R17 bln last week from R8.8 bln the week before. We do not expect volumes to return to normal levels until the vacation season is over, so we assume that the share of nonresidents in the market will be close to 28.4% at the end of this week.