Rates on short-term OFZs exceeded rates on long-term government bonds for the first time since July last year

For the first time since July last year, rates on short-term OFZs exceeded rates on long-term government bonds. The increase in the yield of short-term securities occurs on expectations of a tightening of monetary policy and a rate hike at the next meeting of the Board of Directors of the Central Bank. Analysts allow the key rate to increase by 1–2 percentage points, to 13–14%. But the rise will be short-lived, and a decline is possible already in the first half of the year, and therefore the yield on long-term securities reacts less strongly to the Central Bank’s policy.

According to the Moscow Exchange, on September 7, the yield on short-term OFZ bonds approached 12% per annum for the first time since April 2022. Since the beginning of the week, rates on these securities have increased by 0.9–1.3 percentage points (pp). An increase in rates is also observed in longer-term securities, but less significantly. The yield on medium-term OFZ bonds increased by 0.4–0.6 percentage points, to 11.7–11.8% per annum, the yield on long-term securities rose only by 0.3–0.4 percentage points, to 11.7 -11.8% per annum.

This occurred against the backdrop of a decline in the cost of debt securities, as a result of which the Moscow Exchange government bond index for the first time since November 2022 rolled back close to the level of 600 points, having lost more than 2% since the beginning of the week.

Bond rates are rising amid increased expectations of a further increase in the key rate. The head of the Bank of Russia, Elvira Nabiullina, also spoke in favor of this step last Friday. This week, Deputy Chairman of the Central Bank Alexei Zabotkin also noted that pro-inflationary risks in Russia remain significant, and therefore the possibility of raising the key rate at the meeting of the regulator’s board of directors on September 15 cannot be ruled out.

In the three weeks since the unscheduled rate increase to 12%, pro-inflationary risks have not decreased, pushing the Central Bank to tighten monetary policy, analysts confirm. The trend towards a weakening ruble exchange rate continues; the dollar exchange rate has exceeded 98 rubles/$ and is heading towards the level of 100 rubles/$, which increases inflationary expectations.

“Many importers and businessmen began to include in their plans a dollar exchange rate of 100 rubles/$ and higher, which in the coming months will be reflected in higher prices,” notes Sovcombank chief analyst Mikhail Vasiliev. In addition, lending rates remain high, and the unemployment rate remains low, which is also a pro-inflationary risk, he says.

An inversion of the yield curve, where short-term rates exceed long-term rates, in developed markets usually indicates an impending recession. In the Russian market, it reflects the expectation that strict monetary policy will be temporary. Nevertheless, analysts who did not expect a rise in the key rate just a few weeks ago are now talking about the inevitability of this step. Analysts at Alfa Bank expect an increase of 0.5 p.p., Renaissance Capital (in the base scenario) – by 1 p.p., Sovcombank – by 2 p.p.

However, as noted in Renaissance Capital, “three circumstances can be cited in favor of maintaining the key rate.” Moreover, the first two have already been implemented by the Central Bank in the form of a short-term intensification of foreign currency sales and tightening of consumer lending standards. “Third, seasonally adjusted inflation still began to slow down in August, and did not accelerate further relative to July,” analysts note.

If the rate remains the same, Vladimir Evstifeev, head of the analytical department of Zenit Bank, believes that its reduction will be possible no earlier than the second quarter of 2024, while a reduction from levels of 13–14% can begin in the first quarter.

The primary market has already felt the consequences of the rapid rise in rates – investors began to demand higher returns from issuers, notes Maxim Chernega, head of the DCM department of the corporate finance department at Digital Broker. At the same time, the Ministry of Finance canceled both auctions for the placement of OFZ last Wednesday “due to the lack of applications at acceptable price levels.”

At the same time, Mr. Chernega notes, the number of companies that are trying to raise funds on the debt market at some acceptable rates has increased. “Most likely, floaters will appear on the market, since they are a convenient tool for all market participants,” he explains.

“An increase in yields along the entire curve implies an increase in the cost of borrowing for the Ministry of Finance and may imply both the prioritization of OFZ with a variable coupon in the near future, and the prioritization of other sources of covering the budget deficit,” according to Renaissance Capital analysts. First of all, in their opinion, this will come from additional oil and gas revenues, which “are expected to be at a high level already in September.”

Vitaly Gaidaev