Rates Weekly - July 20, 2021. Finance Ministry to Offer R20 bln of 10y Nominal OFZ at Weekly Auctions

> Ruble liquidity: O/N rates rising on 100 bp key rate hike expectations. Over the last couple of weeks, expectations for a 100 bp key rate hike on July 23 have strengthened. As a result, banks have been opting to over-average and demand for liquidity has increased. We expect banks' correspondent accounts at the CBR to rise above R4 trln and remain there until this Friday (the day of the CBR meeting), almost R1.5 trln above the required level. However, some of this liquidity will be used to pay R2.1 trln in taxes next week, so it shouldn't put too much pressure on O/N rates. Since we now expect the CBR to hike the key rate by 100 bps on Friday, and since the decision would take effect Monday, we believe O/N rates will continue to rise, reaching about 6.2% early next week.> OFZs and rates: Finance Ministry to offer R20 bln of 10y nominal OFZ at weekly auctions. For this week's auctions, the Finance Ministry kept the offer volume in line with last week at R20 bln, a rather conservative level when taking into account that its weekly borrowing need for the remainder of the year is R50 bln. The only bond to be offered this week is the 10y OFZ 26239 (July 2031). Amid the ongoing rally in US Treasuries, we think demand could be higher than the previous auction for the same bond on July 6, when bids came to R18 bln and the entire offer of R10 bln was placed at a weighted-average yield of 7.34%. That level implied just a 3 bp yield premium over the secondary market.Ruble liquidityO/N RATES RISING ON 100 BP KEY RATE HIKE EXPECTATIONSOver the last couple of weeks, expectations for a 100 bp key rate hike on July 23 have strengthened. As a result, banks have been opting to over-average and demand for liquidity has increased. Banks have kept around R4 trln on correspondent accounts at the CBR, which is R1 trln above the required level for reserves averaging.In order to do this, banks cut back on their placement of funds at the CBR's weekly deposit auctions to R0.6 trln last week and just R0.4 trln this week, well below the respective amounts offered of R1.4 trln and R1.2 trln. Moreover, this week their demand for the CBR's monthly repo with a minimal interest rate of 5.6% jumped to R400 bln, well above the R100 bln offered. Against this backdrop, O/N rates have climbed above the key rate, to 5.8% currently.We expect banks' correspondent accounts at the CBR to rise above R4 trln and remain there until this Friday (the day of the CBR meeting), almost R1.5 trln above the required level. However, some of this liquidity will be used to pay R1.4 trln of taxes next Monday (VAT and MET) and R0.7 trln next Wednesday (profit tax and EPT), so it shouldn't put too much pressure on O/N rates. Since we now expect the CBR to hike the key rate by 100 bps on Friday, and since the decision would take effect Monday, we believe O/N rates will continue to rise, reaching about 6.2% early next Zs and ratesFinance Ministry to offer R20 bln of 10y nominal OFZ at weekly auctionsThe OFZ curve bull-steepened over the last week, with yields up to the 5y tenor falling 10-15 bps and longer-dated yields tightening 1-6 bps. Short IRS/XCCY rates slid 10-20 bps, while the longer part of the curve nudged down by 5-10 bps. The main trigger for these moves was a reported slowdown in weekly inflation to 0.06% from 0.46% the previous week (the sharp jump the week before looked driven by annual tariff indexation). However, we would take the weekly data with some caution, as the weekly basket takes into account a smaller number of goods and services prices. Meanwhile, the CBR also noted the absence of clear signs of an inflation slowdown recently in one of its analytical materials. Its analysis of the most persistent components of inflation showed that inflationary pressures remain elevated as consumer demand expands while supply-side constraints remain.For this week's auctions, the Finance Ministry kept the offer volume in line with last week at R20 bln, a rather conservative level when taking into account that its weekly borrowing need for the remainder of the year is R50 bln. The only bond to be offered this week is the 10y OFZ 26239 (July 2031). Amid the ongoing rally in US Treasuries, we think demand could be higher than the previous auction for the same bond on July 6, when bids came to R18 bln and the entire offer of R10 bln was placed at a weighted-average yield of 7.34%. That level implied just a 3 bp yield premium over the secondary market. ,