OFZ: The yield curve has become inverted – the first time since 2017

RUSSIA ECONOMICS - In Brief 26 Oct 2021 by Alexander Kudrin

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Friday’s CBR decision to hike the key rate by 75 bps (to 7.5%), accompanied by a hawkish statement from the regulator, became a negative surprise for the bond market. Despite the acceleration of inflation, which reached 7.8% as of October 20, the market was expecting a more moderate action, but then quickly revised the forecast of key rate trajectory and currently prices in its increase up to 8% until year-end. The latter has caused an upward shift of the OFZ yield curve. It is no surprise that the move was stronger at the short end of the curve, which is more sensitive to the fluctuation of the key rate. As a result, the spread between the 10y and 2y paper turned negative (-10 bps) for the first time since 2017.This pattern cannot be treated as an early sign of a future recession, but reflects the views of market participants on inflation dynamics. The bulk of them think that the current spike of inflation will be relatively short, while in the longer run the CPI is likely to be significantly lower. Besides that, the short and long ends of the curve are dominated by two different groups of investors. Domestic commercial banks, the cost of funding for which largely depends on the key rate level, are primarily active in the first segment. Longer-term paper is traditionally in the focus of international players. The carry trade for them now looks attractive, and hence we at GKEM Analytica expect more inflow of foreign capital into OFZ in coming months. The latter may both cause a certain appreciation of the ruble and keep the inversion (or a pattern close to it) of the yield curve in place. The situation may change only when the market receives a clear signal that inflat...