OFZ Weekly Flows - March 15, 2021

Nonresident OFZ flows remained fairly balanced last week: there was a modest R3.5 bln net outflow for the week, while the day-to-day fluctuations were not sharp. It seems that investors are continuing to take a wait-and-see approach ahead of Friday's CBR meeting and given the high volatility in US yields. Meanwhile, last week was the last one before the start of the blackout period before this Friday's CBR meeting. Comments from CBR officials were fairly hawkish (Deputy Governor Alexei Zabotkin said that policy in 2021 would be "on average soft," allowing for the possibility of the key rate rising above 5%). This pressured short-term issues more than others. There were huge volumes traded in this segment, which leads us to believe that nonresidents decided to extend the maturity of their OFZ holdings by selling the short end and buying the middle of the curve. Flows were more subdued in the belly and at the long end due to the rising dollar yields and weak auction for the 7y OFZ, whereas support came from comments by Finance Ministry officials that the OFZ borrowing plan for this year may be reduced (by R875 bln, according to the latest reports). We do not expect to see significant changes in nonresident holdings this week ahead of Friday's CBR meeting.> Nonresident outflow from OFZ market totaled R3.5 bln last week, according to NSD data. The biggest inflow came in the 4y OFZ 26234 (July 2025), with inflow of R4.3 bln, the 6y OFZ 26226 (October 2026), into which R2.7 bln entered, and the 2y OFZ 26220 (December 2022), which saw R2.5 bln added. The biggest outflow, meanwhile, was in the 5y OFZ 26229 (November 2025), from which R8.7 bln departed, the 10y OFZ 26218 (September 2031), with outflow of R6.2 bln, and the 3y OFZ 26227 (July 2024), from which R5.7 bln was removed.> Last week two nominal issues were offered with no limit, with just R43 bln in total placed. The 14y OFZ 26233 (July 2035) was placed with a premium of just 1-2 bps, while the 7y OFZ 26236 (May 2028) was issued with a premium of 2-3 bps. The Finance Ministry is sticking with its strategy of testing various segments of the curve at each auction. We therefore think that this week two nominal issues might be offered up. We think it could be the 10y OFZ 26235 (March 2031), which has gone the longest among nominals without being issued. The inflation-linked issue, which is typically auctioned during the third week of the month, may also be offered this week. If sentiment improves, the 5y nominal OFZ 26234 (July 2025) might be offered up as well.> The nonresident share in the OFZ market dropped 9 bps to 21.42% over March 9-12, according to NSD data. We think that if nonresident holdings do not significantly change, as was the case last week, and the Finance Ministry places roughly R40 bln at this week's auction (also similar to last week's result), the nonresident share could edge slightly lower to 21.35%. > Holdings of OFZs remain highly concentrated. According to the CBR's February "Overview of Risks to Financial Markets" report, the largest OFZ holder currently has 17.7% of total outstanding OFZs, while over half of the market (51.1%) is in the hands of the top 10 holders. Of the holdings of these top 10 largest investors, 83% of are held by local investors. The largest share of nonresident holdings is from investors based in the UK and US (which have 6.9% of the total market apiece, a respective R947 bln and R944 bln). The direct holdings of retail investors in the OFZ market are not large at just 1.1% of the total market. > The same report shows that the main buyers at OFZ auctions in February were SIFIs and non-banking financial institutions. Their share in purchases reached a respective 43% and 30%, while nonresidents reduced their share to 20%, from 41% in January. However, in absolute terms, the volume of nonresident purchases increased in February to R29 bln, from R25 bln in January. The absolute purchases of SIFIs and non-banking financial institutions climbed to R62 bln and R43 bln, respectively. > CBR report shows nonresidents continued to sell OFZs in secondary market. In February, the net selling reached R65 bln, up from R34 bln in January and R25 bln in December. Supporting the market were SIFIs and other banks, which bought a net R59 bln and R22 bln, respectively.