OFZ Weekly Flows - March 22, 2021

Over the past week, OFZ yields climbed 15-20 bps due to selling from nonresidents in the wake of the rise in long-dated US Treasury yields, burgeoning concern about sanctions and hawkish rhetoric from the CBR. Under pressure the most were medium-dated issues. This is because the short end of the curve had already priced in at least three rate hikes this year, while the long end had been battered by a sharp selloff in February. Against this backdrop, the middle of the curve saw net outflow of R20 bln, versus just R3.5 bln at the short end, while flows in long-dated paper were essentially balanced. We continue to prefer long-dated issues and believe that if US yields don't rise further, OFZs in the 10y and longer segment could see yields drop by up to 5 bps this week. Meanwhile, at the beginning of this week, outflows from short- and medium-dated issues will likely continue given that the selling seen on Friday following the CBR decision will only be reflected with a lag. Also, we think investors will continue to position for what they expect to be further rate hikes in the coming months.> Outflow from nonresidents totaled R23.7 bln over the last week, according to NSD data. The biggest inflow was seen in the 3y OFZ 26227 (July 2024), into which R4.1 bln was invested, and the 10y OFZ 26235 (March 2031), which saw R2.2 bln added. The largest outflow, meanwhile, came in the 6y OFZ 26207 (February 2027), from which R8.6 bln was removed, the 9y OFZ 26228 (April 2030), which saw R3.9 bln taken out, and the 7y OFZ 26212 (January 2028), the outflow for which totaled R3.3 bln.> Last week the Finance Ministry placed three issues with limits (two nominals and one inflation-linker), with issuance totaling just R60.2 bln. The 10y nominal OFZ 26235 (March 2031) was placed with a small premium of around 2 bps, while the 5y nominal OFZ 26234 (July 2025) and 10y inflation-linked OFZ 52003 (July 2030) were issued at the levels of secondary-market quotes. If this week the Finance Ministry sticks to its strategy of testing various segments of the market, we think it may offer the 7y OFZ 26236 (May 2028) and 15y OFZ 26233 (July 2035) with limits. However, given the significant pressure on medium-dated paper over the last week and the lack of demand in this segment, we think a more defensive approach would be to only offer the 15y issue with a limit. > The nonresident share in the OFZ market dropped 26 bps to 21.16% over March 15-19. We expect the outflow from the short end and middle of the curve to continue, which could push the nonresident share down to 21% by the end of the week.