Why investors bought up OFZ with a yield of 11.85% at the government bond auction

The auction for placement of government bonds with constant income (OFZ-PD) held on November 22 turned out to be successful for the Ministry of Finance. Thanks to increased demand from large banks, the yield amounted to 11.85% per annum. This is the lowest value since August. Credit institutions are buying government securities in anticipation of the completion of the cycle of raising the key rate by the Central Bank and to ensure short-term liquidity standards. However, analysts warn of persistent inflation risks and a possible long period of tight monetary policy.

Raising funds on the debt market is becoming increasingly cheaper for the Ministry of Finance: on November 22, the weighted average yield on the OFZ issue with maturity in May 2038 was 11.85% per annum. The result was 0.32 percentage points lower than the rate at the previous auction for such securities, held on November 8. The yield on them was lower at the end of August (11.35% per annum).

Profitability also decreased relative to the secondary market. Chief analyst for debt markets at BC Region, Alexander Ermak, estimates the difference at 12 bp. p. to the close of trading on November 21. The placement of long-term OFZ-PD at a discount to the secondary market has been taking place for the third auction day, but previously the gap did not exceed 4–5 bp. P.

The Ministry of Finance was helped to improve the placement conditions by high demand from large investors.

Based on the results of collecting applications, the total interest in the issue amounted to 135.7 billion rubles, which is a third higher than the figure for the last similar auction.

The Ministry of Finance satisfied only half of the demand – 67.5 billion rubles. According to Alexander Ermak, out of 65 satisfied applications, 15 were in the amount of 1.1–11 billion rubles. They accounted for about 87% of the total placement volume. Moreover, the applications “were quite dense, so that at the cut-off price, 12 applications were satisfied, which accounted for almost 42% of the placement volume,” clarifies Mr. Ermak.

Due to the fact that a significant part of the demand fell on large orders, banks became the main buyers, experts believe. According to the chief analyst of Sovcombank, Mikhail Vasiliev, such interest on the part of credit institutions may be due to the fact that from the beginning of 2024, for large systemically important banks, relaxations on meeting short-term liquidity standards will be canceled: “It seems that banks have begun to buy OFZ in advance to meet the standards from the new year.” Maxim Chernega, head of the DCM department of the corporate finance department at Digital Broker, admits that banks could increase the limits on OFZ-PD, although “just recently everyone was complaining that all the limits had been selected.”

Yields on government bonds are now generally significantly below the key rate (15%), market participants note.

According to Maxim Chernega, investors may think that the Central Bank’s tough policy will lead to a reduction in inflation and the cycle of easing monetary policy is close to the end. “Thanks to the strengthening of the ruble, there are now no expectations for a further increase in the key rate – quotes ROISFIX (swap on the rate of short-term interbank deposits RUONIA.— “Kommersant”) up to a period of six months indicate maintaining the key rate at 15%,” notes Dmitry Gritskevich, manager for analysis of the banking and financial markets of PSB.

Meanwhile, analysts call investor optimism premature, believing that rates on the debt market have not yet stabilized. Dmitry Gritskevich draws attention to the fact that “the inflationary impulse in the economy continues, and the growth rate of consumer prices at the end of the year may exceed the Central Bank forecast” (7.0–7.5%). “Next year, high budget expenditures will continue, which is also a pro-inflationary factor,” the expert adds.

Mikhail Vasiliev estimates the likelihood of a key rate increase at the end of the year by 100 bps. p., up to 16%, at the level of 60%. In his opinion, investors “should be prepared for the fact that the current period of tight monetary policy may be prolonged, and the key rate will remain in double digits throughout 2024, and possibly part of 2025.”

Vitaly Gaidaev