Tired capital: demand for OFZ will recover after a decrease in the key
The demand for OFZs will begin to recover steadily when the market believes in a reduction in the key rate to 12-13%, experts polled by Izvestia believe. As long as it remains at 14.25%, investors are willing to buy long-term securities only with yields up to 17%, and such a loan is too expensive for the Ministry of Finance. Therefore, for the first time since 2020, the agency has put auctions on indefinite pause. The quarterly borrowing plan of 1.5 trillion rubles is now under threat. How will the authorities be able to cover the growing budget deficit if the break drags on? — in the Izvestia article.
Why did the Ministry of Finance suspend the issue of bonds
The Ministry of Finance has put the placement of federal loan bonds (OFZ) on pause to help stabilize the market, the ministry's press service reported on the evening of July 20. The next auction was scheduled to take place on the 22nd. When the bidding resumes, the Ministry will announce additionally.
This is the third cancellation in less than a month. Earlier, the agency refused auctions on June 24 and July 8 due to high volatility. The government debt market began to fever after the Central Bank's decision on June 19 to reduce the key rate by only 0.25 percentage points, to 14.25%. The last time the Ministry of Finance stopped the placement for an indefinite period was in March 2020. Izvestia sent a request to the ministry.
Investors were waiting for a faster rate cut, but the cautious move by the Central Bank showed that cheap money would not return soon, said Denis Astafyev, fund manager and founder of the SharesPro fintech platform. After that, the demand for OFZs dropped sharply: market participants do not want to invest in securities at current prices for a long time.
The Finance Ministry has taken a break because it can no longer borrow on terms acceptable to itself, agrees Freedom Global analyst Vladimir Chernov. According to him, due to inflation, expensive money and doubts about further rate cuts, investors are demanding higher returns. Already on July 1, the agency was able to attract only 9.1 billion rubles, and on the 15th, the placement of floating-yield bonds completely failed — there were no suitable applications. Continuing auctions would mean either canceling them regularly, or agreeing to loans that are too expensive, the expert noted.
Since the beginning of July, the RGBI government bond index has lost almost 2%, and since the beginning of the year — about 6%, according to the Moscow Exchange. However, after the decision of the Ministry of Finance, it immediately jumped by 1.9%.
Stocks also went up. At the start of trading on July 21, the Moscow Exchange index added 4.1% and peaked at 2,083.7 points, according to data from the site. A day earlier, it dropped below 1,900 points for the first time since October 2022. Analysts explained the rebound by closing short positions and buying cheaper securities. However, it is too early to talk about a market reversal: it is still under pressure from sanctions risks, expectations for the key interest rate and dividend payments.
When will the demand for Russian government debt recover
The pause is likely to last at least until the Central Bank's meeting on July 24, according to Freedom Global analyst Vladimir Chernov. If the regulator keeps the rate at 14.25%, but makes it clear that it will go down further, the demand for OFZs may come to life.
The mechanism is simple: investors will try to buy long-term securities while they provide high income and fix it for several years. After the rate reduction, deposits and new bonds will bring less, and the coupon for purchased OFZs will remain the same. There will be more buyers, securities will become more expensive, and their profitability will fall. This is a plus for the Ministry of Finance: the lower the percentage required by the market, the cheaper it is for the government to borrow. Therefore, auctions may resume as early as the end of July or the beginning of August, the expert believes.
If the Central Bank gives a harsh signal and inflation accelerates again, investors will decide that the rate will remain high for a long time or even rise even more. Then they will prefer to wait for more profitable papers, and the pause will drag on for several weeks, Vladimir Chernov added.
For sustained demand for long–term OFZS with a fixed coupon, the rate needs to drop closer to 13.5-14%, the analyst believes. At the same time, the market should believe in its further decline. Floating coupon securities may still be of interest to investors, but the Ministry of Finance will have to offer a good premium.
The profitability of some long-term OFZs reaches about 17%, said Vladimir Eremkin, senior researcher at the Presidential Academy. The difference with the key rate reaches 2.85 percentage points. According to him, demand may return when the gap narrows to at least 1.5 percentage points. This will be helped by reducing budgetary and geopolitical risks.
The main thing is not a specific rate, but confidence in its further reduction, says Yulia Myagkova, associate professor of the Department of Global Financial Markets and Fintech at Plekhanov Russian University of Economics. Short—term OFZs will be the first to revive - the Central Bank's signal about passing the peak of inflation may be enough for this. Sustained interest in long-term securities will appear when the market expects a rate cut to 12-13% or lower.
Analysts interviewed earlier by Izvestia expect the Central Bank to keep the rate at 14.25% on July 24, but warn that monetary policy easing may be delayed.
How to cover the budget deficit
In the third quarter, the Ministry of Finance planned to hold 14 auction days: five in July and September and four in August, Denis Astafyev from SharesPro recalled. The agency expected to borrow 1.5 trillion rubles: 900 billion through OFZ for up to 10 years and 600 billion through longer securities.
Formally, the plan has not changed, but July 8, 15 and 22 have already dropped out of the schedule. On average, it was planned to borrow 107 billion at a time. The longer the pause lasts, the more you will have to attract at each auction, the expert noted.
If the auction resumes only in August, the remaining nine dates will account for 165-170 billion rubles each, estimated Yulia Myagkova from the Russian University of Economics. Such volumes will require higher yields, additional auctions, or a focus on short OFZ and floating coupon securities. Therefore, the risk of not meeting the quarterly plan remains high, she believes.
It is possible to attract 165-170 billion rubles at a time with strong demand from banks and large floater issues (OFZ with floating yields), agrees Vladimir Chernov from Freedom Global. Such volumes are currently too high for long-term fixed coupon bonds. Therefore, some of the loans may be postponed to the fourth quarter or the program structure may be changed.
If auctions return on July 29, there will be 10 trading days ahead, said Nikita Borodanov from Finam. Since the beginning of the quarter, the Ministry of Finance has borrowed only about 10 billion rubles, so an average of 149 billion rubles will be required for each remaining date. This will require active demand from large investors, more favorable rates, or an increase in the share of floaters, which have also declined in interest.
Higher OFZ yields will increase treasury costs, Yulia Myagkova warned. The budget for servicing the national debt in 2026 includes 3.9 trillion rubles, but expensive new loans will inflate this amount. At the same time, the volume of Russia's borrowings at the beginning of July was over 37.5 trillion rubles.
The Ministry of Finance has few alternatives: to use the National Welfare Fund or to reduce less important expenses. However, the fund's capabilities are limited, and it is difficult to cut costs — a significant part of them falls on social security and defense. Therefore, bonds will remain the main source of borrowing, the expert believes. This is especially important with the growing treasury deficit, which experts estimate at 7 trillion by the end of the year.
An attempt to quickly catch up on the plan will also affect business, Yulia Myagkova added. To sell so many OFZs, the Ministry of Finance will have to increase profitability. Then companies will need to offer even more interest on the bonds. It will become more profitable for banks to invest in reliable government debt rather than lending to enterprises. As a result, loans for businesses will become more expensive, and it will become more difficult to get them.
So the pause only postpones an expensive choice: to borrow now at a high interest rate or to postpone the debt for later. There are almost no alternatives to OFZ, and without a reduction in the rate, the bill will rise anyway — first for the budget, and then for companies.
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