OFZ: moving to an inverted curve

RUSSIA ECONOMICS - Report 03 Aug 2021 by Evgeny Gavrilenkov and Alexander Kudrin

Long-term OFZs demonstrated a strong performance in the second half of July, their yields compressing by 30-35 bps. Many investors suppose that the tightening phase of the CBR’s monetary policy is almost over and that interest rates in Russia will move down in the longer term. The potential decrease of the inflation target by the CBR may be treated as another reason for that. The Finance Ministry is using the situation to increase the amount of OFZ placement, but the potential supply remains limited, which may also push down the yields of longer paper. The short end of the curve will depend directly on the CBR key rate. The latter is likely to remain stable in the coming months, but, theoretically, may be increased if inflation accelerates, and in this case the whole curve may become inverted.

* Investors do not expect that high inflation will last, and this goes in line with our view. As mentioned in previous reports, the regulator is likely to keep the interest rate unchanged in the coming months as the annualized CPI 3M and 6M moving average will start to decrease rapidly.

* CBR Chairperson Nabiullina said that in September the regulator will examine the possibility of lowering the inflation target to 2% or 3%, while the final decision will be made by the middle of 2022. The potential decrease of the target from the current relatively high level (4%) appears logical as Russia is likely to demonstrate a moderate pace of economic growth in the coming years.

* International investors started to rebuild positions in OFZs. In the week of July 19, net purchases of the ruble sovereigns by non-residents reached R44 bln, which is the highest weekly inflow since November 2020.

* The Finance Ministry raised almost R1.8 trln via OFZ issuance in 7M21. Thus, only about R1 trln of supply is left for the remaining five months of the year, or about R47 bln per auction. The latter amount is small, given the potential growth of international investors’ exposure.

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