OFZ Weekly Flows - November 2, 2020

Trading in the OFZ market has been very thin ahead of tomorrow's US election. Despite the significant deterioration in the external backdrop and weakening of the ruble, last week saw mild inflows to the OFZ market from nonresidents (although it is possible that due to the lag in settlement, the beginning of this week could see an uptick in outflows as shown by the NSD data). This week, ahead of the US election, we expect the Finance Ministry to auction off an amount similar to previous weeks. After this week, however, we expect it to significantly cut down issuance. > NSD data shows R3.1 bln in nonresident inflows last week. The biggest inflow (R8.9 bln) came in the OFZ 26226 (October 2026), while the new OFZ 26235 (March 2031), which was offered for the first time at last week's auction, saw R5.4 bln enter. The biggest outflows, meanwhile, came in the ОFZ 26227 (July 2024), from which R7.7 bln departed, and the OFZ 26224 (May 2029), which saw R2.3 bln taken out.> Last week saw record placement volume for one auction (R437 bln); 75% of 4Q20 issuance plan has been met. On Friday, Finance Minister Anton Siluanov stated that the ministry would be gradually decreasing the "aggressiveness" of its domestic borrowing. The ministry will likely curtail issuance of floaters. We do not expect to see a decrease in the volume of nominal bonds issued. (continued on next page)In fact, if volatility doesn't rise following the US election, we think the ministry might gradually increase its offering of the nominals. We think this may be the case because after the previous auction the share of floaters exceeded 25% of the total outstanding volume - this has previously been an important boundary for the ministry. This week, due to the public holiday in Russia, the OFZ auction is scheduled for Tuesday (election day in the US) rather than Wednesday. This means that the announcement about which issues will be offered up is likely to be made today. We believe that the ministry will probably auction off the OFZ 29018 (November 2031), the new R450 bln floating-rate issue it registered last week. Demand for nominal issues remains extremely low, so we assume it will go ahead with a more "defensive" option, such as the OFZ 26234 (July 2025). Alternatively, it might limit itself to just a floater and not offer a nominal issue at all. We think the Finance Ministry will likely issue an amount comparable to previous weeks but that after this week it will slow the pace of issuance. Meanwhile, on Friday, VTB CEO Andrei Kostin said that OFZ yields have reached an attractive level for the bank and that it was prepared to increase its holdings from the current R400-500 bln to R750 bln by the end of the year. This will provide support for the market.> Nonresident share in OFZ market down 0.8 pp to 23.1% last week amid high offer. If the Finance Ministry offers around R300 bln, it would likely result in the nonresident share of the market declining another 0.5 pp to 22.6%.