On November 13, 2024, the Russian Ministry of Finance conducted a highly successful auction of federal loan bonds (OFZs), achieving sales exceeding 88.95 billion rubles—the strongest result over the last two months. The auction featured two bond series, OFZ-PD 26246 and 26248, both with substantial investor interest, marking a notable return of demand in Russia’s government debt market.
Auction Highlights
In this round, the Ministry of Finance offered investors two OFZ-PD issues (fixed-coupon federal loan bonds):
- OFZ-PD 26246 – Issued May 15, 2024, maturing on March 12, 2036.
- OFZ-PD 26248 – Issued May 15, 2024, maturing on May 16, 2040.
Both issues carry semi-annual coupons with rates of 12.00% and 12.25% per annum, respectively, aiming to attract long-term investors by providing predictable returns amid market volatility.
Key Auction Data
For both OFZ series, the Ministry of Finance allowed investors to bid within the remaining amount available for issuance, using a cut-off strategy based on demand levels and the premium requested above prevailing market rates. Here’s how each bond series performed:
OFZ-PD 26246
- Auction Demand: 68.98 billion rubles (9.4% of available issuance).
- Allocated Amount: 39.84 billion rubles, covering 5.7% of the remaining issuance and satisfying 60.4% of investor demand.
- Cut-Off Price: 78.54% of face value.
- Weighted Average Price: 78.61% of face value, yielding 16.82% annually.
- Secondary Market Yield Comparison: Ended at a 16.63% yield, showing a 5 basis point (bps) premium over the auction yield.
OFZ-PD 26248
- Auction Demand: 72.39 billion rubles (10.8% of remaining issuance).
- Allocated Amount: 49.11 billion rubles, representing 7.3% of the remaining issuance and satisfying 67.8% of demand.
- Cut-Off Price: 77.36% of face value.
- Weighted Average Price: 77.38% of face value, yielding 16.95% annually.
- Secondary Market Yield Comparison: Ended at a 16.85% yield, reflecting a 4 bps premium over the auction result.
These results highlight a clear return of investor confidence in long-term OFZ instruments, particularly from major banks, as indicated by the high percentage of demand met and the competitive yields achieved.
Impact of Results on the Bond Market
This auction’s success represents the largest placement of long-term OFZs since May 2024, with average yields significantly reduced from previous weeks—down from 17.55% to 16.9%. The strong demand from large financial institutions suggests improving sentiment regarding Russia’s future inflation trajectory and potential key rate adjustments.
Despite these gains, inflation remains a concern, as recent data showed a 0.3% increase in consumer prices, accelerating from prior weeks. Thus, analysts project that OFZ yields could hover between 16.8% and 17% in the coming weeks, with macroeconomic indicators in November likely to guide yield movements. A return to the higher 17.3-17.5% range seems unlikely given current demand dynamics, barring any major inflation shocks.
Performance of OFZ Bonds in the Secondary Market
In the secondary market, OFZ bonds saw a surge in prices following positive global financial trends. This rally in OFZs was partly attributed to the US presidential election results on November 5, boosting financial markets worldwide. Consequently, yields on OFZ bonds declined by an average of 81 bps during the week ending November 12, reversing the previous week’s 15 bps increase.
Yields on short- and medium-term OFZ issues fell between 23-95 bps (averaging -71 bps), while long-term bond yields dropped by 69-111 bps (averaging -94 bps). Over the week, the trading volume in OFZs rose sharply, reaching 71.33 billion rubles (up from 47.79 billion rubles in the previous week), with long-term issues leading the way. The most actively traded issues included OFZ-PD 26243 (18% of the volume), OFZ-PD 26248 (15%), and OFZ-PD 26247 (14%).
Demand Surge and Long-Term Prospects
The November 13 auction for the 12-year OFZ-PD 26246 drew demand 38% higher than the previous auction, with the placement volume reaching 39.8 billion rubles—over three times the amount placed eight weeks ago. The 16-year OFZ-PD 26248 saw demand 5.4 times greater than the prior auction, reaching a placement volume of 49.1 billion rubles—four times higher than four weeks ago. This heightened demand reinforces the Ministry of Finance’s expectation of sustained market interest in long-dated government bonds.
Fourth Quarter Issuance Goals and Market Outlook
The Ministry of Finance aims to raise 2.4 trillion rubles in OFZ issuance for the fourth quarter of 2024, with 2 trillion rubles allocated to bonds maturing in more than ten years. To date, only 206.8 billion rubles have been raised across seven auction days in October and November, achieving just 8.6% of the quarterly target. Given the substantial shortfall, the Ministry is likely to intensify issuance, potentially increasing the supply of variable-coupon OFZs in the coming months, similar to the response seen in 2020 and 2022.
Current Yields on Selected OFZ Series
As of the latest trading data, the yields to maturity (YTM) on various OFZ series are as follows:
- OFZ-PD 26234 – YTM 21.4%, maturing July 16, 2025
- OFZ-PD 26207 – YTM 20.6%, maturing February 3, 2027
- OFZ-PD 26236 – YTM 19.4%, maturing May 17, 2028
- OFZ-PD 26242 – YTM 18.7%, maturing November 17, 2032
- OFZ-PD 26233 – YTM 16.0%, maturing July 18, 2035
- OFZ-PD 26243 – YTM 16.5%, maturing May 19, 2038
- OFZ-PD 26238 – YTM 15.6%, maturing May 15, 2041
Conclusion
The robust demand and substantial placements observed in the November 13 auction underscore a renewed interest in long-term Russian government debt, driven by attractive yields and improved sentiment among institutional investors. However, with significant issuance targets remaining for the fourth quarter, the Ministry of Finance may continue to increase supply to meet its objectives, potentially adjusting terms and coupon structures as needed to ensure strong uptake in future auctions.
Investors and market participants will closely watch inflation data and any updates on the central bank’s policy stance as these factors will play a critical role in shaping OFZ yield trends in the weeks to come. The Ministry’s performance in meeting its quarterly issuance goals may also serve as a key indicator of the health and resilience of Russia’s bond market under current economic conditions.
