Rates Weekly - July 6, 2021. Modest Offer at OFZ Auctions

> Ruble liquidity: Demand for liquidity set to jump at beginning of new averaging period. In the run-up to the new averaging period (starting tomorrow), the CBR lowered its limit for its regular 1w deposit auction today to R1.18 trln from R1.78 trln last week, which is unsurprising given that banks' demand for liquidity is set to rise in the near term. Most banks will likely be willing to "over-average" before the upcoming CBR meeting on July 23, where the key rate will likely be hiked by 50 or even 100 bps. Hence, we expect the RUONIA rate to hold near the key rate level of 5.50% over the coming several days. We think that without the expectations of a rate hike, it could be around 15 bps below the key rate.> OFZs and rates: Modest offer at tomorrow's OFZ auctions. The 3Q21 auctions will kick off tomorrow with an offer of R10 bln in the 10y OFZ 26239 (July 2031) and R10 bln in the 20y OFZ 26238 (May 2041). Such a modest offer comes as a surprise to us, given that the current quarterly borrowing plan implies a little over R50 bln being raised weekly. In our view, this is a sign that the Finance Ministry is not that concerned about falling behind the borrowing plan, at least for the time being, and thinks it can make the difference up later. In our view, such a flexible approach is a positive factor, which should help long-term OFZs weather a potential hawkish surprise in the June inflation data tomorrow (we see a considerable risk that it will be higher than in May in seasonally adjusted terms). Taking also into account the CBR's talk about a potential downward revision of its inflation target, as well as the prospects of a larger than 50 bp hike at the July meeting, the current market environment still looks geared toward an outperformance by long-dated OFZs.