Yesterday's auction received UAH9.4bn of demand, mainly for 12-month bills, but also strong demand for two- and three-year securities. Proceeds for the state budget amounted to almost UAH7.6bn. The MoF decreased interest rates for 12-month paper only.

The 12-month bills were almost twice oversubscribed, with UAH5.2bn of demand and UAH3bn of the cap. Almost half of the demand was in non-competitive bids (satisfied at the weighted average rate). Interest rates in competitive bids were similar to the previous auction, in the range of 15.9%‒16.2%. The MoF decided to satisfy all non-competitive demand (UAH2.4bn) and to sell the rest of the cap to competitive bids with rates not higher than 16%. Therefore, the cut-off and weighted average rates slid by another 10bp to 16%.

Demand for two-year bills increased more than fivefold to UAH2bn, keeping interest rates unchanged from last week. At the same time, the demand for three-year notes declined to UAH2.2bn and remained with the same interest rates as last Tuesday. Therefore, the MoF would have to reject most bids to decrease interest rates for these two securities. Thus, the Ministry satisfied all bids, keeping interest rates at 17% and 18.3% for two-year and three-year securities, respectively.

Investors expect that the NBU may lower the key policy rate and rates for CDs again, so they are trying to buy more bonds at the current YTMs. Therefore, demand remained considerable in recent weeks, but with minimal opportunities for the Ministry of Finance to reduce interest rates for UAH bonds. As early as next Tuesday, we can see a further reduction in rates for all UAH instruments, but more aggressively for one-year bills and much slower for two- and three-year instruments.

RESEARCH TEAM: Taras Kotovych

See the full report here.

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