ICU Weekly Insight, 26 July 2023 - Bond Market Insight

Reinvestment of USD-denominated redemptions

Yesterday, the Ministry of Finance borrowed almost UAH15bn (US$403m). More than half of the funds were in hard currency. Most likely, many investors reinvested funds from last week's redemption of USD-denominated bills.

The FX-denominated paper brought 56% of all funds raised for the budget yesterday. However, the MoF sold fewer bonds than planned: the cap was set at US$250m while the total amount of demand was US$237m, including US$150m in non-competitive bids. Investors submitted as many as 138 bids with interest rates ranging from 4.3% to 4.8%. As the Ministry accepted all demand, the cut-off rate remained unchanged, and the weighted average decreased by only 3bp to 4.71% compared with the bond placement at the end of June. A slight change in the weighted average rate indicates small competitive demand with low rates.

Three-year notes also provided the state budget with large funds, UAH5bn (US$137m) or 34% of all proceeds. The MoF can include this new issue in the benchmark’s list, and the NBU allowed banks to use it to cover part of the required reserves. The MoF sold this paper at the same interest rate as the previous one—19.75%. Demand was almost unanimous and even exceeded the supply by UAH263m (US$7m).

The rest of the bonds offered at the auction received the usual low demand. Only eight bidders purchased 14-month bills for almost UAH900m (US$25m) at an unchanged rate of 18.3%. At the same time, the Ministry placed even less—UAH540m (US$15m) of 1.5-year military bills—rejected three bids for UAH150m (US$4m), and once again reduced the cut-off rate by 5bp to 18.85% and the weighted average by another 9bp to 18.81%.

The auction results are generally as expected. Investors reinvested in the primary market over half of the hard currency they received last week. The Ministry of Finance issued new paper that can be added to the "reserve" list, which banks could actively buy prior to a possible reduction in the key policy rate tomorrow. The MoF did not fail to lower the interest rate on 1.5-year instruments even more. Tomorrow's NBU's decisions may influence the next auction, so the new placements' terms may differ.

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Research team: Taras Kotovych.

See the full report here.