Rates Weekly - March 17, 2020

> Ruble liquidity: Banks hoarding liquidity, but money market functioning well and O/N rates remain low. Since March 11, when oil prices collapsed and the ruble weakened 10%, banks have accumulated around R1.5 trln in excess liquidity in response to the high volatility and uncertainty in markets. Some even started borrowing via the CBR's standing facilities. However, the CBR reacted swiftly, offering R500 bln at a fine-tuning repo auction, and the situation quickly normalized, with O/N rates easing to 5.3%. Over the coming week, they could climb a bit higher, as the liquidity surplus will shrink but remain significant. However, if the situation deteriorates considerably in global or Russian financial markets, rates will rise sharply, though probably not for long, as the CBR is committed to providing ample ruble liquidity.> FX liquidity: Russia starting to feel global dollar liquidity squeeze, which is getting worse despite the Fed measures. The FX segment of the Russian money market had been holding up quite nicely despite a much weaker ruble and much lower oil prices. However, the situation has started deteriorating recently, as the global dollar liquidity deficit is growing in spite of the extraordinary measures taken by the Fed. It seems that the US money market has begun operating in crisis mode, meaning that trust among banks has broken down. In light of this, and given the significant (though milder than 2014) external debt payments due this year from Russian banks and corporates, we would expect the CBR to reintroduce FX repo and FX collateralized loans soon, which would support FX liquidity.> OFZs and rates: Intensifying global risk aversion sparks outflow of nonresident investments, pushing long-dated OFZ yields above 8%. Most of the selling last week was attributable to nonresidents, while some of the bigger local players were able to absorb at least some of this pressure. Based on NSD data for March 10-16, we estimate that the share of nonresidents in the OFZ market as a whole fell nearly 1 pp to 32.8% (on outflow of roughly R90 bln). This Friday, we expect the CBR to keep the key rate on hold, while committing to providing ample ruble and FX liquidity. If this happens, short OFZs will see support, while the risk premium in longer issues is unlikely to shrink. We therefore expect the slope of the OFZ and XCCY curves to steepen.