OFZ Weekly Flows - October 25, 2021. International Outflows Set to Resume This Week

Last week, the OFZ market recorded a small net international inflow of R10.3 bln. This was the first inflow since the week ending September 24. The major recipient of the inflows was the new, 8y OFZ 26237 (March 2029), which saw R10 bln of nonresident purchases. Another R7.8 bln came into the 6y OFZ 26232 (October 2027), while foreign accounts cut their positions in the 4y OFZ 26229 (November 2025) by R7.2 bln. We believe that this week's data will most likely show a tangible outflow of internationals (there is a lag of several days between actual trades and when they show up in the data) following the unexpectedly hawkish outcome to last Friday's CBR meeting. Short OFZ yields jumped 50-60 bps on Friday and today, while the back end of the curve has risen 25-40 bps. In our view, these movements reflect not only a repricing of the near-term key rate trajectory, but also a repricing of the risk-premium for uncertainty over the CBR's future actions. Friday's meeting was the second meeting in a row that the market has been wrong in its assumption about the outcome (tellingly, investors overestimated the scope for a rate hike in September and then underestimated it in October). Another reason to support international outflows this week is that global inflation expectations remain on the rise, as commodities continue to surge (Brent crossed $86/bbl this morning, which is a three-year high).> The full offer size of R20 bln was placed last Wednesday without any notable yield premium to secondary quotes during the auction. However, the market had been weak in the morning, and the bid-to-cover ratio was only 2, so it is hard to conclude that the auction was strong.> Local subsidiaries of international banks were net sellers of OFZs. They lowered their exposure by R55 bln last week. This mostly involved selling 6y and 10y floaters in chunks of R18-19 bln. > The nonresident share of the OFZ market remained little changed on the week at around 21.1%.