Rates Weekly - December 7, 2021. Finance Ministry to Offer Only Nominal OFZs for Second Week in a Row

> Ruble liquidity: O/N rates set to surge well above key rate on seasonally high demand for liquidity, key rate hike expectations. Banks' current accounts with the CBR are likely to hover around R3.6 trln over the next week, R0.3 trln higher than the required level. This is normal at the beginning of a new reserves averaging period, when demand for liquidity usually picks up. But this time, the demand picture could be exacerbated by the fact that banks need more liquidity in December to offset growth of cash in circulation and conduct elevated transaction volumes ahead of the New Year holidays. In total, these factors should result in a liquidity outflow of R0.5-0.6 trln. Meanwhile, demand for liquidity will also be higher due to the fact that banks will likely over-average ahead of the CBR's key rate decision in December, as the market expects a key rate hike of 100 bps. All of these factors combined should push O/N rates up to 7.7-7.8% over the next week, 20-30 bps above the key rate, as happened in July ahead of a 100 bp key rate hike.> OFZs and rates: Finance Ministry to offer only nominal OFZs for second week in a row. Tomorrow, the Finance Ministry will offer R30 bln in the nominal 10y OFZ 26239 (July 2031). This is below the offer volume last week, which was R40 bln, though such an amount of DV01 supply still looks elevated in the broader context of the last several weeks - for instance, weekly auctions were cancelled on November 24, while on November 17 the R30 bln offer volume was split between R20 bln in a 10y nominal OFZ and R10 bln in a 11y CPI-linker. Unless market conditions improve, it will be hard for the market to digest the entire amount at only the usual 2-5 bp yield premium.