OFZ: the yield curve is inverted after reopening

RUSSIA ECONOMICS - In Brief 21 Mar 2022 by Alexander Kudrin
Today, the OFZ market reopened after a two-week break. The decision to suspend trading was aimed at limiting volatility amid waves of anti-Russian sanctions. The trading session was divided into two parts. In the morning, it was a discrete auction to discover the price for the opening of the market. According to its results, the yield in the short end of the curve was set close to CBR key rate (19-20%), while for the long-term paper it was lower (14-16%). The second part of the session allowed regular trading from 1 pm till 5 pm. During these hours, the yield curve moved down to 16-17% in the short end and to 13-14% in the longer part.To remind, foreign holders of the Russian papers are not allowed to unwind their position in OFZ apart from REPO and similar operations. Hence, the OFZ market is dominated by local commercial banks, and many of those attracted significant amounts of ruble deposits in the past several weeks, and in general are “locked” in domestic currency. After CBR's decision to keep the key rate at 20% on Friday, local investors started to price in its contraction in the coming months with a higher level of confidence. The inverted form of the curve also confirms that many of them expect a deceleration of inflation in the years to come.According to our understanding, participation of CBR in the trading session was minimal (if any) and the current level of the yield curve may be considered as “market-based”. The further dynamic of the curve will depend on both CBR decisions on its key rate, and external developments (while forthcoming weekly inflation prints will be of a lesser). In general, the reopening of the OFZ market was successful, and we expect t...

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