Russia raises $1bn in OFZ government bonds as sentiment improves

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MOSCOW — Russia’s Foreign Ministry raised nearly $1 billion at a government bond auction on Wednesday, returning to the market after a two-week pause caused by a large-scale sale in a context of heightened geopolitical fears.

The ministry has had to cancel weekly OFZ government bond auctions twice this year, citing increased volatility. But as the ruble pared its losses, it came back into the market, a sign that trade sentiment was normalizing.

Registering a request for 102.9 billion rubles ($1.35 billion), the Ministry of Finance raised 74.7 billion rubles ($982.41 million) in OFZ bonds maturing in 2029 at a yield average of 9.59%, marking the most successful auction since August.

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“The market is recovering after a massive sell-off by non-residents,” said Evgeny Suvorov, an economist at CentroCreditBank.

OFZ bonds were once popular among foreign investors thanks to lucrative yields, but the share of non-residents in the bonds has recently declined due to geopolitical risks. Big Russian banks are the main buyers of OFZ bonds that Russia uses to fill fiscal holes.

Substantial uncertainty in the OFZ market now relates to when the Bank of Russia might end its monetary tightening cycle, Suvorov said.

The central bank is expected to continue raising rates this year as it grapples with stubbornly high inflation that is near six-year highs, well above the 4% target.

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A Reuters poll of market experts predicted that the central bank would raise its key rate by 100 basis points to 9.5% on February 11. Some analysts predict another rate hike in March to 10%.

Once the bank signals an end to rate hikes, investors could step up their purchases of OFZ bonds, betting that bond prices will automatically rise as soon as Russia begins to cut the cost of lending later in 2022.

“We see the best potential entry point for local currency bonds in Russia…at the end of 1Q22 after geopolitical uncertainty subsides and the monetary policy rate hike cycle peaks (at 10, 0% for Russia),” Renaissance Capital analysts said in a note.

($1 = 76.0375 rubles) (Report by Andrey Ostroukh Editing by Bernadette Baum)