OFZ softened the yield – Newspaper Kommersant No. 201 (7402) dated 10/28/2022

Interest rates on long OFZ fixed below 10% per annum. Demand for debt securities is growing amid stabilization of the geopolitical situation, as well as expectations of maintaining the key rate at the next meeting of the Central Bank. If the financial regulator gives a signal to keep the rate at the current level (7.5%) until the end of the year, the yield on ten-year government bonds may drop to 9% per annum.

After a sharp rise in the second half of September and a new five-month high, government bond yields have dropped below 10% per annum this week. Thus, the rates returned to the values ​​they were before the announcement of partial mobilization in the country. Since the beginning of the month, the yield of short OFZ bonds has decreased by 1.3-1.4 percentage points (p.p.) to 7.2-7.6% per annum, the rates of medium-term securities have fallen by 1.2-1.4 p.p. ., up to 8.12–9.8% per annum, long-term bonds – by 0.85 percentage points, below 10% per annum.

Several factors contributed to the return of rates to the values ​​of five weeks ago.

In part, investors calmed down after reports from several Russian regions about the completion of partial mobilization. According to them, this will reduce uncertainty in the economy and help reduce the risks of financial stability.

In turn, this means less risk of raising the key rate of the Central Bank and less burden on the budget, including through a reduction in borrowings from the Ministry of Finance. “Some of the hopes of investors are related to the fact that US support for Ukraine may decline after the midterm elections to Congress on November 8, in which control may pass from the Democrats to the Republicans,” said Mikhail Vasiliev, chief analyst at Sovcombank.

In addition, market participants note declining inflation. On Wednesday, the Ministry of Economy reportedthat price growth in Russia in annual terms slowed down last week to 12.9% compared to 13.1% a week earlier. “Inflation in recent weeks has not exceeded the seasonal norm, and its dynamics fits into the forecast range of the Central Bank at the end of the year of 11-13%. Together with the stabilization of the financial system, this reduces the risks of raising the key rate,” notes Mr. Vasiliev. According to Alfa Capital portfolio manager Yevgeny Zhornist, if the rate of inflation continues to decline, it will be possible to see its precipitous decline in March-April 2023. “Against this background, the Central Bank gets the opportunity to further reduce the rate, which will give an additional stimulus to the economy,” he notes.

The exit of the Ministry of Finance with the offer of new securities put some pressure on the secondary market, Anton Kulikov, an analyst at BCS Mir Investments, believes. On Wednesday, the agency held three OFZ auctions and attracted a record amount of funds to the budget since April 2021 — 178 billion rubles. (see “Kommersant” dated October 27). But, according to Mikhail Vasiliev, the Ministry of Finance attracted the bulk of the funds received through floaters (OFZ with a floating coupon), which puts less pressure on the yield of classic government bonds.

At the same time, even taking into account the decline in yield, it still contains a high premium to the key rate. According to PSB Chief Analyst Dmitry Monastyrshin, the yield of medium-term and long-term government bonds – 160-240 basis points (b.p.) to the Central Bank rate – exceeds the average historical premium to the key rate. With stable expectations for the key rate, ten-year government bonds traditionally traded with a premium of no more than 70 bps. “The current level of OFZ yields takes into account macroeconomic uncertainty, the federal budget deficit in 2023-2025, as well as the risks of an increase in the Central Bank rate in the medium term,” explains Mr. Monastyrshin.

In this regard, the results of the Central Bank meeting on Friday, from which most analysts expect the rate to remain at the current level, will be very important for the market.

“The implementation of this scenario, as well as a neutral signal regarding the prospects for monetary policy and the preservation of forecasts for a slowdown in inflation in 2023, can be positively perceived by investors,” said Dmitry Monastyrshin. According to him, while maintaining the key rate at 7.5% at meetings in October and December, the yield of ten-year OFZ by the end of the year may drop to 9% per annum.

Vitaly Gaidaev