OFZ Weekly Flows - February 1, 2021

Amid a lack of positive triggers, the OFZ market remained very flaccid over the last week. A trickle of buying from nonresidents gave way to sluggish purchases by locals. Investors are mostly in wait-and-see mode amid rising geopolitical risks, still-high inflation in Russia and concern about possible hawkish rhetoric from the CBR. Another risk facing the OFZ market is the Finance Ministry's hefty issuance plan for the current quarter. The currently high demand for liquidity is curtailing demand from local banks for nominal OFZ issues. Nevertheless, the Finance Ministry is not planning to increase the share of floating-rate paper. In fact, we expect it to offer this type of paper only toward the end of 1Q21 in order to meet the quarterly plan. As a result, given that liquidity at banks should improve in the coming weeks and with floaters not set to be offered, we think local players will become more active in the market. The currently excessive real yield at the long end of the OFZ curve looks attractive to us. But we think that a trigger for nonresidents to boost holdings would be a stabilization on the geopolitical front and in Russia's inflation numbers.> Nonresident flows over the last week showed R12.4 bln in outflow. In terms of inflow, the largest came in the 6y OFZ 26226 (October 2026), which saw R4.5 bln come in, and the 7y OFZ 26232 (October 2027), for which inflow totaled R4.3 bln. (continued on next page)Slightly behind was the 10y inflation-linked OFZ 52003 (July 2030), for which inflow came in at R4.2 bln - this is what was purchased at the auction. The largest outflow, meanwhile, came in the 6y OFZ 26207 (February 2027), from which R7.7 bln was withdrawn, while the 4y OFZ 26222 (October 2024) and 8y OFZ 26224 (May 2029) both saw outflows of R4.1 bln. > Only R10 bln in the inflation-linked OFZ 52003 was placed last week despite still-high inflation and its being a convenient instrument for pension funds, as it is yielding above inflation. The auction came amid a period of global risk-off, although the Russian inflation data published prior to the auction triggered modest growth in demand for the inflation linker. The fact that issuance of nominals is currently being curtailed is supporting these issues in the secondary market. We think that in the near future the Finance Ministry will stick to that approach, at least until secondary-market activity picks up. At this week's auction we would expect another R20 bln limit - we think the issue offered might be the 7y OFZ 26236 (May 2028). This issue is in the segment where trading has been concentrated in recent days. > According to NSD data, nonresident share of OFZ market narrows 11 bps to 22.48% in week of January 25-29. We believe that the Finance Ministry will place a volume comparable to last week's. If the rhetoric about possible sanctions against Russia does not pick up, we think the nonresident share could climb back to 22.55%.> According to CBR data, the nonresident share in the OFZ market fell 0.7 pp to 22.70% in November-December. This comes from the CBR's latest financial risks report and represents the share of nonresidents on the accounts of foreign depositaries at the NSD. Overall, the volume of nonresident holdings increased by R128.0 bln in November-December, with a R102.2 bln increase in November alone. However, the share of foreigners in nominal OFZs has remained stable at 37% since the beginning of August. Today, the full data on the dynamics of nonresident holdings in December will be released. Judging by the full data already provided by the CBR for November and the NSD data for November-December, we think the nonresident share of the whole market will most likely be essentially flat at 23.80%.> SIFI share at OFZ auctions drops off in December after placements of nominals halted. According to CBR data, banks took up 82.5% of the volume placed at auctions in November (R644.6 bln purchased) versus 42.7% in December (R50.1 bln purchased). Nonresidents and subsidiaries of foreign companies saw their share at auctions increase 15.6 pp to 21.3% in December, while nonfinancial organizations' share rose 15.4 pp to 20.3% and non-SIFI banks' share grew 8.75 pp to 15.60%. Judging by the NSD data, we think that nonresidents took up 35% of the volume of inflation-linked OFZs placed in November-December.