Rates Weekly - February 24, 2021

> Ruble liquidity: O/N rates creeping higher ahead of taxes, but liquidity is still abundant. Last week, liquidity was balanced, and ahead of tax payments this week O/N rates climbed from recent lows of about 3.9% to 4.08% today. Due to settlement of CBR operations, even tomorrow (when most of taxes are due) we don't expect any liquidity deficit and see banks' correspondent accounts at the CBR at R2.6 trln, which will be slightly above the level necessary for averaging. Later, we expect liquidity to flow in due to traditional budget spending at the end of one month and the beginning of the next one. Against this backdrop, we would expect the RUONIA to return to 4% over the period from this Friday to next Tuesday. Notably, cash in circulation keeps growing in February, as it has done in previous years. It seems that there is a risk that the CBR's expectations of the decrease in cash-in-circulation this year by R200-400 bln after the excessive R2.6 trln growth last year won't materialize.> OFZs and rates: Long-term OFZs have outperformed foreign peers since the start of last week. The Finance Ministry decided not to hold an OFZ auction during this shortened work week, which has helped create a benign backdrop. Another supportive factor has been expectations that the ruble will strengthen as exporters begin to sell hard currency ahead of looming tax payments. Even though real OFZ yields are starting to look slightly less attractive in comparison with yields on peer issues, the long end of the curve has not lost its appeal. We expect the inflow of foreign money to continue. If demand from local banks at the coming OFZ auctions holds up, this would be an indication that the market is recovering. However, there are a handful of factors likely to prevent a sharp drop in OFZ yields, including a potential further rise in US Treasury yields, as well as concern that local banks will lose interest in OFZs as yields drop and that the Finance Ministry will again start to offer generous premiums at auctions in order to meet its borrowing targets.