Low demand for 1-year REPO can push OFZ yields higher

RUSSIA ECONOMICS - In Brief 22 Jun 2020 by Alexander Kudrin
Today the CBR held its first long-term REPO auction and offered commercial banks 1-year loans up to R400 bln at a floating rate (equal to the key rate plus 25 bps). The aggregate demand was only R5.1 bln, which is definitely below market expectations. GKEM Analytica can offer several possible explanations for this situation.First of all, liquidity conditions have improved since the announcement of the new REPO facility in early May. For example, the structural liquidity surplus grew from R1.4 trln as of May to R2.0 trln today. As a result, additional funding needs from the second-tier banks decreased.Banks' liquidity has likely increased amid increased budgetary spending. Federal budget already turned into a deficit May and in June this deficit could have widened due to mid-year increase in monthly expenditures.On top of that, the CBR delivered 100bp rate cut effective from today which was a significant move and created a kind of new environment on the money market. The CBR also hinted that more rate cuts are possible. Even though today's REPO offered a floating rate it didn't look attractive as it can be expected that the liquidity may not be in short supply due to the widening of the budget deficit in 2H20. ing to widenSecondly, the OFZ yield curve moved significantly down during the past few weeks. As a result, only long-term papers are fit for buy-and-hold operations with financing via LT REPO. GKEM Analytica noted previously that local banks prefer to operate in the front and middle parts of the curve while purchasing bonds with a longer maturity, which is associated with additional market risk, is not the traditional area of their activity. Besides, banks need to...

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