Rates Weekly - January 11, 2022. Ministry Opens the Year with Unlimited Auctions

> Ruble liquidity: Liquidity to be balanced at start of new reserves averaging period. At the end of last year and the start of this one there was a lot of excess liquidity due to seasonal inflows. Today, the CBR conducted a weekly deposit auction with a limit of R2.4 trln, which banks have almost fully utilized. Tomorrow, a new reserves averaging period starts, and we expect the current accounts of banks at the CBR to hover closer to the required level of R3.3 trln. So, liquidity will be balanced, and hence we would expect O/N rates to increase to 8.4%.> OFZs and rates: Ministry opens the year with unlimited auctions. This week, the Finance Ministry has decided to offer a combination of a nominal paper (March 2029s) and a CPI-linker (March 2032s) in the size of the respective residuals. This will be the first time since September that the issuer will conduct auctions with no limits - for instance, in December, all weekly offerings were limited to R30-50 bln. Given the prevailing weak market conditions, the 8y OFZ 26237 (March 2029) are unlikely to draw greater demand than at the previous auction for the paper on December 15 (R42 bln). Meanwhile, demand for the 11y CPI-linker (March 2032) could exceed the level of its last offering in November (R9.3 bln), as the bond offers tangibly better carry (its principal is due to be indexed by 1.1% in January, versus only 0.15% in November). Ruble liquidityLiquidity to be balanced at start of new reserves averaging period At the end of last year and at the start of this one there was a lot of excess liquidity due to year-end high budget spending and a return of the cash to the banking system after the New Year holidays. As a result, O/N rates have been subdued and traded around 8%, while yesterday and today the CBR conducted fine-tuning deposit auctions with a limit of R2.6 trln. Today, the CBR conducted a weekly deposit auction with a limit of R2.4 trln, which banks have almost fully utilized. Tomorrow, a new reserves averaging period starts, and we expect the current accounts at the CBR to hover closer to the required level of R3.3 trln. So, liquidity will be balanced, and hence we would expect O/N rates to increase to 8.4% Zs and ratesMinistry opens the year with unlimited auctionsSellers have been dominating OFZ trading during the first several sessions of the year, for several reasons. These include the sharp spike in US Treasury yields during the Russian new year holidays, a decline in demand to place free ruble liquidity from local market participants, a lack of progress on the domestic inflation front, and the still-cloudy geopolitical situation in the region. The front end of the curve has underperformed this week, with yields rising 35-50 bps. The middle and long end have climbed 20-30 bps. We think the curve will continue trading in a similar pattern for the near future. At the end of December, the Finance Ministry published its domestic borrowing plan for 1Q22: R700 bln is slated to be issued in the quarter. For comparison, the plan for 4Q21 was R520 bln, of which only half ended up being placed. The 1Q22 plan looks quite ambitious given how things played out in 4Q21. There are 11 auctions planned in 1Q22, which means that an average of R64 bln per auction week would need to be placed to meet the plan. The ministry intends to focus on OFZs in the 5-10y segment, where around R350 bln is guided to be placed. The long end is expected to see R300 bln, while the short end will see R50 bln.The preliminary inflation estimate for December was published at the end of last month. It showed that price growth slowed to 0.82% from 0.96% in November. This was above the Bloomberg consensus of 0.7%. Adjusted for seasonal factors, inflation remained at nearly twice the average monthly level that would correspond to the CBR's annual target of 4%. We think this indicates a fairly high likelihood of a rate hike of 75-100 bps at the next CBR meeting in February.This week, the Finance Ministry has decided to offer a combination of a nominal paper (March 2029s) and a CPI-linker (March 2032s) in the size of the respective residuals. This will be the first time since September that the issuer will conduct auctions with no limits - for instance, in December, all weekly offerings were limited to R30-50 bln. Given the prevailing weak market conditions, the 8y OFZ 26237 (March 2029) are unlikely to draw greater demand than at the previous auction for the paper on December 15 (R42 bln). Meanwhile, demand for the 11y CPI-linker (March 2032) could exceed the level of its last offering in November (R9.3 bln), as the bond offers tangibly better carry (its principal is due to be indexed by 1.1% in January, versus only 0.15% in November). ,