Rates Weekly - June 1, 2021. We recommend paying 1y basis FX swaps, as FX liquidity will stay at comfortable levels

> Ruble liquidity: Following unexpected spike, O/N rates are set to decrease at the end of reserves averaging period. Last week O/N rates rose to 5% given a lack of excess liquidity. To our surprise, large budget inflows took place only on Friday, probably closer to the end of the day, so they didn't affect the liquidity situation. However, this week O/N rates have eased to 4.8% in light of significant excess liquidity. Over the next five working days, which will be the last in the current reserves averaging period, excess liquidity appears set to expand due to budget spending and declining demand for liquidity. Against this backdrop, we expect O/N rates to gradually step down to 4.6% early next week, when excess liquidity should reach around R1.5 trln, and the CBR is likely to conduct a fine-tuning deposit auction.> FX liquidity: We recommend paying 1y basis FX swaps, as FX liquidity will stay at comfortable levels. In April, FX liquidity dropped by $7 bln to around $33 bln. However, it has probably recovered recently, as the O/N basis has risen closer to zero after trading mostly around minus 10 bps in April-May. We see FX liquidity at comfortable levels over the coming months, mainly due to the strong current account. As a result, we recommend paying the 1y FX basis swap, which has recently dropped to -85 bps, as we see its fair value at minus 50-60 bps with the O/N basis around zero.> OFZs and rates: Finance Ministry opts for light offer in 10y issue at tomorrow's auction. For this week's auctions, the Finance Ministry chose the 10y OFZ 26235 (March 2031) with a R20 bln limit and the 4y OFZ 26234 (July 2025) with a R42 bln limit. Last week, the overall offer volume was R40 bln, but there were two long-term papers (10y and 14y) on the table. Therefore, in DV01 terms this week's offer does not look any heavier. Judging by the recent price action and the structure of international demand, we think the 10y bond will attract higher interest this time around and will be placed without a significant premium. We think the auction for the 4y issue will see a premium, which investors will require for the risk of the CBR becoming even more hawkish. Therefore, we think the auction results will likely be supportive of our bear-flattening call that we expressed in our note, "How to Play a Front-Loaded Rate Hike Cycle."