OFZ is ... OFZ: definition, market, rates

The Ministry of Finance of Russia follows a 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. Within the framework of this policy, in 1995, in June, the issue of OFZ was held. These are federal loan bonds, but already with a variable coupon.

What is OFZ?

Bonds of the federal loan, or OFZ, is one of the types of securities in Russia that is issued by the Ministry of Finance. In fact, the bonds have a standard format, their only feature is that the security of the securities is provided by the state itself. Trade in assets is held on the Moscow Stock Exchange. Purchase of bonds can be made through any broker. Bonds of OFZ bonds can be purchased and kept by residents of Russia and foreign citizens. The price for one bond is 1000 rubles. Depending on the paper format, its yield is determined, comparable to modern deposit programs. The main purpose of these securities is to attract capital to the country's budget.

The next stage of development of the market

In Russia, only the Ministry of Finance deals with the issue of OFZ. In fact, these are bonds, the high level of reliability of which is provided by the Russian state. Bidding with OFZ is held within the framework of the Moscow Stock Exchange. You can buy assets through any broker. Buyers and holders of OFZ can be both Russian and foreign legal entities and individuals. For one bond, buyers give 1000 rubles. The yield of a trading instrument is comparable to the yield of a bank deposit. The release of the updated bonds in 1995 marked the stage of development of the market when it is ready to accept debt obligations with a duration of more than a year. Bidders have already been enriched by experience in order to operate with new sophisticated tools. Normative documents and technological base were prepared very quickly. In the technological aspect, the placement of bonds, their circulation and redemption are similar to those related to GKOs.

Bonds with variable coupon income

OFZ is one of the types of securities that are presented in several formats. Paper with an unknown coupon income of variable type (OFZ-PC) is popular. Documents provide their owners the right from time to time to receive interest income. Periodicity of payments can be two or four times a year. The size of each of the OFZ-PC coupons is announced right before the very beginning of the coupon period, it depends on the current yield on the issue of T-bills, which have almost the same payout period with coupons. It is possible to receive a discount if federal loan bonds (OFZs) have a cost of placement in the primary or secondary market less than the cost of their redemption, including at par. OFZ - are securities with a nominal value of 1,000 rubles with a validity of 1 year to 5 years.

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

OFZ-AD, OFZ-FD and OFZ-PD are bonds that belong to the category of securities with known coupon profit. The size of the securities is announced by the issuer before the issue is issued, and their owners are fully entitled to receive a systematic interest income. As with the previous category of bonds, it is envisaged to receive a discount on identical terms. Depending on the type of asset, the period of its circulation can vary from 1 year to 30 years. The nominal value, with the exception of OFZ-FD, is equal to 1,000 rubles. For FD, the nominal value can vary from 10 to 1000 rubles. The form of the issue is documentary. The storage of a printed asset is a prerequisite for its repayment in the future.

Release Features

For each bond issue, there is a state registration code that is similar in structure to the GKO code. The exception is only 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 duplicate, which are kept in the depository of the Ministry of Finance. Coupon yield is the main difference between bonds from GKOs.

OFZ market with floating coupon income

The placement of OFZ with a floating rate on the Russian stock market was evidence of the expansion of the scope of debt 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 may be caused by significant fluctuations in interest rates typical for long-term investments. The likelihood of losses of the investor, which is afraid of their increase, decreases, and the borrower, who does not want to reduce them.

In the world in 1996, bonds with a variable rate occupied about 46% of the market. In Russia, the popularity of OFZ-PD is constantly growing. This indicates that the market is undergoing drastic changes. Coupon income becomes evident not only at the time of payment, but also at the conclusion of contracts in the secondary market. When concluding a deal, the buyer must not only pay the nominal value of the bond, he must pay the coupon yield, which must correspond to the time of the asset's location from the seller. Like all securities, OFZ-PC 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 possibilities of Western capital investors in the direction of investing in domestic securities. Domestic segment for foreign market participants is attractive for the reason that the purchase of securities, which expire in excess of one year, opens certain prospects. So, the calculation for the acquired assets can be made in rubles and directly from the investment account. Opportunity is opened for further conversion of ruble profit to foreign currency units with profit repayment, respectively. GKO-OFZ is an excellent opportunity to completely diversify risks on 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 rates of the OFZ market are constant and variable. Constant or fixed rates are set for each coupon period of each individual issue. Variable rate is formed taking into account official data characterizing the level of inflation. The OFZ rate depends to a large extent on the CBR's key rate . The difference between the indicators is only a few points. After the spring reduction rates below 13% market participants continue to expect a decline in the indicator. This is evidenced by the low demand for debt obligations. So, in the April deposit auction in the amount of 110 billion rubles at a rate of 12.5% managed to place only 75 billion at a rate of 13.02%. As for bonds, the market has established their profitability at the level of 10.72%. The demand was three times higher than the current offer. They did not impose blocked financial channels on the situation as a result of sanctions from Europe. Western investors, interested in the rate, continue to actively participate in the bidding.

What are the plans of the Russian government?

For the government of Russia, the OFZ market is an excellent opportunity by means of a loan to cover the budget deficit. In the future, it is planned to issue securities worth 250 billion rubles, with a net volume of 112 billion rubles. To date, since the beginning of the year, bonds worth 93.3 billion rubles have already been sold with a net volume of attracting minus 12.9 billion rubles. Among the estimated volume of securities, assets worth 150 billion rubles will have a period of up to five years, 80 billion rubles are planned to issue securities with a term of 5 to 10 years. A total of 20 billion rubles will be issued securities with a rotation period of more than 10 years. Most of the papers in the future will have a floating rate. According to experts, the March bonds issued by the CBR were too overpriced, and in this regard, all bidders expect a decline in their value by the end of spring. The weakening ruble continues to exert dominant pressure on the bonds.