OFZ Weekly Flows - September 7, 2020

Despite the high volatility caused by geopolitical risks, nonresidents continued to bid the middle of the curve, whereas they were largely not trading longer-dated issues. At last week's auction, a nominal issue was added to the lineup for the first time in a while. Nonresidents were responsible for roughly a quarter of the bids for the issue, a level of demand comparable to what was seen at previous auctions. Meanwhile, we think the Finance Ministry will stick to emphasizing issuing floating-rate paper, due to which we think the share of nonresidents in the market will continue to drop, potentially reaching 27% by the end of this week. > Net inflow from nonresidents over last week reached R3.1 bln. The biggest inflow was seen in the 10y OFZ 26228 (inflow of R11.3 bln) and 4y OFZ 26227 (R5.7 bln), while the biggest outflow came in the 6y OFZ 26228 (R9.8 bln) and 5y OFZ 26209 (R3.5 bln). > We think around 25% of demand for the nominal issue at last week's auction came from nonresidents. The Finance Ministry managed to place R222 bln at last Wednesday's auction. The weekly guidance for the rest of the month now stands at R95 bln. The ministry issued R188 bln in the 6y OFZ 29014 (March 2026). Demand from banks was significantly higher given that deposit rates have now been adjusted in line with the key rate. In the nominal OFZ 26228 (April 2030), R28 bln was placed out of the R34 bln still available at a small premium of just 2 bps to secondary quotes (see our OFZ Auction Results report from last week). > We expect a new mid-dated nominal issue to be registered soon. With volatility high, investor attention is shifting to this segment of the curve. However, the only issue that can still be placed is the 7y OFZ 26232, of which just R43 bln remains. Given the redemption schedule, we think a new issue maturing in 2029 will be registered, although it's possible that the Finance Ministry will opt to instead register additional volumes in existing issues. > This year's borrowing target will be raised to R4.2-4.5 trln on a net basis, according to Deputy Finance Minister Vladimir Kolychev. The previous target, announced at the end of June, was R3.5 trln (up from the initial R1.7 trln projected in the 2020 budget). Kolychev said OFZs will account for most of this volume. The ministry is planning to redeem a net $2 bln of Eurobonds, so the volume of OFZs to be placed could as high as R4.6 trln in net terms. The ministry intends to continue placing floaters and stands ready to deploy accumulated cash reserves from previous years (about R1 trln), if necessary. Assuming the ministry is aiming to place a net R4.5 trln of OFZs this year, it will need to place R190 bln per week through the year-end. Last week, it placed R222 bln, but right now it is difficult to say whether it would be able to maintain this pace.> Significant offering in floating-rate paper, in which nonresident demand is minimal, continues to reduce nonresident market share - it was down 50 bps to 27.70% last week. We calculate the volume of the market based on a daily indexation of the par value of the inflation linkers. Given that we expect further significant issuance of the floaters, the share of nonresidents will likely further decrease. We think it may reach 27% by the end of this week.