OFZ is OFZ: definition, market, rates

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The Ministry of Finance of Russia is following the policy of increasing the duration of borrowed funds. The activities of the state apparatus are aimed at expanding the list of financial instruments through which borrowing is carried out. As part of this policy, in 1995, in June, OFZs were issued. These are federal loan bonds, but with a variable coupon.

What is OFZ?

Federal Loan Bonds, or OFZs, are a type of securities in Russia issued by the Ministry of Finance. In fact, bonds have a standard format, their only feature is that the reliability of securities is provided by the state itself. Assets are traded on the Moscow Exchange. Bonds can be purchased through any broker. Both residents of Russia and foreign citizens can purchase and hold OFZ bonds. The price for one bond is 1000 rubles. Depending on the format of the paper, its profitability is determined, comparable to modern deposit programs. The main purpose of these securities is to attract capital to the country's budget.

Anothermarket development stage

In Russia, OFZ issues are handled exclusively by the Ministry of Finance. In fact, these are bonds, the high level of reliability of which is provided by the Russian state. OFZ trading takes place on the Moscow Exchange. You can buy assets through any broker. OFZ buyers and holders can be both Russian and foreign legal entities and individuals. For one bond buyers give 1000 rubles. The profitability of a trading instrument is comparable to the profitability of a bank deposit. The issue of renewed bonds in 1995 marked the stage in the development of the market when it is ready to take on debt obligations with a duration of more than a year. Bidders have also already gained experience in order to operate the new complex instruments. Regulatory documents and technological base were prepared very quickly. In the technological aspect, the placement of bonds, their circulation and redemption are similar to the processes associated with GKO.

Variable income coupon bonds

OFZ is one of the types of securities that are presented in several formats. Papers with an unknown coupon income of a variable type (OFZ-PK) are popular. The documents give their holders the right to receive interest income from time to time. The frequency of payments can be two or four times during the year. The size of each of the OFZ-PK coupons is announced immediately before the start of the coupon period, it depends on the current yield of the GKO issue, which have almostidentical payout period with coupons. It is allowed to receive a discount if federal loan bonds (OFZ) have a cost of placement on the primary or secondary market that is less than the cost of their redemption, including at par. OFZ are securities with a par value of 1,000 rubles with a maturity of 1 to 5 years.

OFZ-PD, OFZ-FD and OFZ-AD: general concept

OFZ-AD, OFZ-FD and OFZ-PD are bonds that belong to the category of securities with known coupon income. The size of the securities is announced by the issuer even before the moment of their issue, and their holders have every right to receive systematic interest income. As with the previous category of bonds, a discount is provided on identical terms. Depending on the type of asset, the term of its circulation can vary from 1 year to 30 years. The nominal value, with the exception of OFZ-FD, is 1000 rubles. For FD, the denomination can vary from 10 to 1000 rubles. The form of issue is documentary. Keeping a printed asset is a prerequisite for its future redemption.

Issue Features

Each issue of bonds is characterized by the presence of a state registration code, which is similar in structure to the GKO code. The only exception is the second category, indicating the type of security. Each issue of OFZ, the yield on which corresponds to most deposit programs, is accompanied by the issuance of a Global Certificate, presented in two copies, which are stored in the depository of the Ministry of Finance. Coupon income is the main difference between bonds and GKOs.

Floating coupon OFZ market

The placement of OFZs with a floating rate on the Russian stock market has become evidence of the expansion of the scope of debt obligations with a variable interest rate. The breakthrough is due to the fact that all bonds of this type in the world provide an opportunity to reduce interest rate risk, which can be caused by significant fluctuations in interest rates, typical for long-term investments. The probability of losses of the investor, who is afraid of their increase, and the borrower, who does not want to reduce them, decreases.

In the world back in 1996, variable rate bonds accounted for about 46% of the market. In Russia, the popularity of OFZ-PD is constantly growing. This suggests that the market is undergoing dramatic changes. Coupon income becomes apparent not only at the time of payment, but also when concluding contracts in the secondary market. When concluding a deal, the buyer must not only pay the face value of the bond, he must pay a coupon income, which must correspond to the time the asset is with the seller. Like all securities, OFZ-PK is taxed in accordance with the procedure established by law.

Participation of foreign investors in the bond market

The GKO-OFZ market is open to foreign investors. The chairmen of the Ministry of Finance of the Russian Federation and representatives of the Central Bank of the Russian Federation expanded the opportunities for Western investors to invest in domestic securities.paper. The domestic segment is attractive for foreign market participants because the purchase of securities with a maturity of more than one year opens up certain prospects. Thus, payment for acquired assets can be made in rubles and directly from the investment account. An opportunity is open for further conversion of ruble profits into foreign monetary units with reparation of profits, respectively. GKO-OFZ is a great opportunity to fully diversify the risks of the investment portfolio. At the stage of market formation, dealers and investors were given the opportunity to carry out not only speculative, but also arbitrage transactions.

Bond market rates

The OFZ market rates are fixed and variable. Constant or fixed rates are set for each coupon period of each individual issue. The variable rate is formed taking into account official data characterizing the inflation rate. The OFZ rate depends to a large extent on the key rate of the Central Bank. The difference between the indicators is only a few points. After the spring rate cut below 13%, market participants continue to expect a decline in the rate. This is evidenced by the low demand for debt. So, in the April deposit auction in the amount of 110 billion rubles at a rate of 12.5%, only 75 billion were placed at a rate of 13.02%. As for bonds, the market set their yield at 10.72%. Demand was three times higher than the available supply. Didn't affecton the situation blocked financial channels of communication as a result of sanctions from Europe. Western investors interested in the rate continue to actively participate in the auction.

What are the plans of the Russian government?

For the Russian government, the OFZ market is a great opportunity to cover the budget deficit through a loan. In the future, it is planned to issue securities in the amount of 250 billion rubles, with a net volume of attraction of 112 billion rubles. To date, since the beginning of the year, bonds have already been sold in the amount of 93.3 billion rubles, with a net borrowing volume of minus 12.9 billion rubles. Among the estimated volume of securities, assets worth 150 billion rubles will have a term of up to five years, it is planned to issue securities for 80 billion rubles with a term of 5 to 10 years. A total of 20 billion rubles worth of securities will be issued with a rotation period of more than 10 years. Most of the securities in the future will have a floating rate. According to experts, the March bonds issued by the Central Bank of the Russian Federation were too overvalued, and in this regard, all bidders expect their value to decrease by the end of spring. The weakening ruble continues to exert dominating pressure on bonds.