Rates Weekly - February 4, 2020

> Ruble liquidity: O/N rates declining and could be lower in general on liquidity inflows. Last week, O/N rates remained elevated for a while but subsequently declined on an influx of liquidity due to budget spending. This week, we see liquidity continuing to flow in, which, combined with expectations of a CBR rate cut and ahead of the end of the reserves averaging period, should push the spread of O/N rates to the key rate even more negative. In general, we see this spread being quite low this year, at about minus 25-30 bps on average, as government spending will come at a brisker pace, while the CBR's purchases of FX and gold will remain a source of liquidity inflow.> FX liquidity: FX liquidity still benign despite reported sharp drop at end of last year. CBR data published last week showed that FX liquidity dropped by a significant $11 bln at the end of last year. However, a significant part of this was purely technical, so the O/N basis became only moderately more negative. So far this year, FX liquidity has partially recovered due to a seasonally strong current account and corporate Eurobond placements, which we expect to keep supporting it later in 1Q20.> OFZs and rates: Finance Ministry to auction off the 10y nominal OFZ 26228 and floating-rate OFZ 24021 tomorrow. The issues will be offered up without limits. Demand for the floater will likely be high, as it was last week, but we expect the ministry to once again accept only a small fraction of the bids. Taking into account the high market volatility and the caution of market participants ahead of the CBR rate decision, we do not expect demand for the nominal issue to be particularly high. This week, the focus will be on Friday's CBR meeting. We expect the regulator to cut the key rate by 25 bps to 6.0%, though the wording of the accompanying statement is likely to turn more hawkish, signaling that the bank would prefer to keep the key rate on hold in March. Such hawkish rhetoric could lead to a rise in OFZ yields.