The Ministry of Finance adjusted its borrowing tactics by offering investors a long-term issue of OFZ
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On the eve of the meeting of the Board of Directors of the Central Bank on the key rate, the Ministry of Finance adjusted its borrowing tactics, offering investors only a long-term issue of OFZ. Such securities are of interest to large market participants, as they allow them to make money on the difference in rates compared to the secondary market. At the same time, the Ministry of Finance continues to place government bonds at a significant premium to the secondary market. And given the expectations that the key rate will be maintained for a long time, new borrowings may become increasingly more expensive.
March 20, Wednesday, Ministry of Finance offered investors only one issue of OFZ (maturity in March 2034). For the previous two months, the ministry weekly placed two issues of classic government securities, one of which was always long-term and unlimited, and the second short-term and within 10 billion rubles. (only on February 28, instead of short OFZs, inflationary OFZs were placed).
However, last week the ministry recognized the placement of a short-term OFZ issue as failed “due to the lack of applications at acceptable price levels” (see. “Kommersant” from March 14), although demand exceeded supply by 30%. The issuance of small short OFZs began at the end of January 2024 at the request of market participants, notes Alexey Bulgakov, head of the debt market analytics department at Renaissance Capital. Therefore, he does not exclude the possibility that the Ministry of Finance paused, deciding that since there is no demand at prices acceptable to it, there is no need to offer them. Moreover, on the eve of the meeting of the board of directors of the Central Bank (on Friday, March 22), investors could ask for too high a premium on profitability.
Demand for the long OFZ-PD issue, the yield on which is less susceptible to changes in the current Central Bank policy, increased compared to the previous placement and amounted to RUB 113.8 billion.
The Ministry of Finance satisfied applications for more than 95 billion rubles. This is the second result this year; the ministry attracted a larger volume on January 17 (RUB 97 billion). At the same time, the weighted average yield reached 13.43% per annum. This result, as noted by Andrey Kulakov, deputy head of the market analysis department at Gazprombank, is 7–8 bp. p. exceeds the yield at the end of the day on Tuesday by 52 bp. p. exceeds the yield when placing bonds of this issue two weeks ago. The Ministry of Finance placed government bonds with a higher yield (14.7% per annum) in October 2015.
13.43 percent per annum
reached the weighted average yield of OFZ at the auction on March 20, 2024.
Due to the fact that the Ministry of Finance predominantly places OFZs with a maturity of over ten years at a premium to the secondary market, banks are primarily interested in them. According to Alexey Bulgakov, banks have an incentive to sell the securities they already have and buy new ones a little cheaper. According to Central Bank statistics from the Financial Market Risk Review, the main sellers of OFZ on the secondary market in February were commercial banks (35 billion rubles), while they took an active part in auctions (175 billion rubles). “Individuals who actively purchased OFZ during the second half of 2023 reduced their positions in February, which partly reflects the activation of margin calls on leveraged positions,” notes Mr. Bulgakov.
The upcoming meeting of the regulator’s board of directors will be important for the primary and secondary debt markets. Analysts have no doubt that the current rate will be maintained (16%), but are awaiting comments from regulator representatives. Sovcombank chief analyst Mikhail Vasiliev admits that the statements may be more “hawkish” than some market participants expect. “Increasing fiscal momentum and the presence of subsidized mortgage programs reduce the effectiveness of increased rates in the economy. This will probably require maintaining a high level of the key rate over the coming months,” notes Vladimir Evstifeev, head of the analytical department of Zenit Bank.
Tough statements from regulator representatives, according to Mikhail Vasiliev, may lead to another revision of expectations for the start of the key rate reduction cycle. This, in turn, could lead to an increase in government bond yields. In such conditions, the expert does not exclude the possibility that in the coming months the yield on long OFZs may rise to 13.5–14% per annum.
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