OFZ Weekly Flows - July 5, 2021. Nonresidents Buy Short-Dated Paper Despite Higher Inflation, Hawkish CBR

Last week, the inflow of nonresident money into short-dated OFZs accelerated despite the pickup in weekly inflation and hawkish comments from CBR representatives. Weekly inflation in Russia came in at 0.23% over June 22-28, which makes it look like y-o-y inflation may climb to 6.3% in June from 5.9% in May (the June data is due Wednesday). Year-to-date inflation already stood at 4.1%. We now think inflation could end the year close to 5.2% (see the story in the July 1 CIS Markets Daily). We believe the continued inflow into short-dated OFZs owed to expectations that the CBR's proactive approach will help it rein in inflation in the near term, as well as a belief that the 5y and longer segment already looks a bit flat. Another source of near-term support for the short end will be the redemption of the R290 bln OFZ 26217 in early August. Given the benign global backdrop for the long end, the strengthening ruble and the fact that nonresidents are still underweight in long-dated OFZs (they were market-weight early this year), we still think the slope from the 5y to 10y mark on the OFZ curve will shrink from the current 20 bps to zero. Market participants have even begun to discuss the possibility of an inverted curve in the medium term.> OFZ market sees R20.6 bln net inflow last week. There was an inflow of R13 bln at the short end, R6.2 bln in the belly and R1.5 bln at the long end. The biggest inflows were in the 4y OFZ 26234 (R14 bln), 9y OFZ 26235 (R7.8 bln) and 7y OFZ 26236 (R5.7 bln). The biggest outflows were from the 5y OFZ 26226 (R8.2 bln) and 3y OFZ 26223 (R2.5 bln).> Finance Ministry places just R8 bln at last week's auction. We view it as a rather positive sign that the Finance Ministry was unwilling to offer large premiums in order to place higher volumes last Wednesday (see last week's OFZ Auction Results). According to the ministry, the share of nonresidents at auctions has shrunk to 50% since the US sanctions came into effect. The borrowing plan for 3Q21 was also released last week. It showed that the ministry intends to place the remaining R1.4 trln from this year's OFZ borrowing plan in equal amounts in 3Q21 and 4Q21 (see the story in the July 1 Debt Markets Today). The volume of redemptions scheduled for 2H21 (nearly R0.7 trln) is higher than the 1H21 amount, which should help the ministry reach its targets.> Share of nonresidents in OFZ market jumps 13 bps to 18.9% last week. The share of nonresidents in fixed-coupon issues alone rose 22 bps to 29.10%. We expect the inflow of nonresident investment to continue, though it should be restrained due to the summer lull in trading activity. We see the share of nonresidents climbing another 10 bps this week and moving closer to 19.0%.