The Ministry of Finance continues to use the primary market sentiment to decrease interest rates on government bills. Yesterday, all offered instruments had lower rates. Despite this, the Ministry borrowed a record amount of funds, over UAH33bn.
Although the longest maturity offered at this auction was two years, demand exceeded expectations, and amounted to UAH10.5bn, concentrated in the two-year bills. Demand for short-term bills was about half. As a result, cut-off rates for all UAH-denominated bills were decreased by 20-26bp. For the shortest, the three month, the rate was lowered to 17%, while for one and two-year bills, it was set at similar level, 17.74% and 17.75%, respectively. This level now is the highest for local-currency bills in the primary bond market.
The MoF did not offer FX-denominated bills for the previous two weeks. Last week, US$0.5bn was repaid, and this week, nearly US$.3bn has to be paid, so demand amounting to US$1.1bn was not a surprise. Taking into account that as autumn approaches, which usually means a weakening of the hryvnia, demand for these bills usually increases.
At the same time, the Ministry also decreased cut-off rates for these bills, rejecting just 8% of demand, in the amount of US$86m. For both US dollars issues with one and two-year maturities, the Ministry decreased cut-off rates by 50bp since last time they were sold in June, to 6.5% and 7%, respectively.
Expectations that the NBU will decrease its key rate on Thursday supported demand for UAH-denominated bills, while limited offerings increased competition for bills up to one year, allowing the Ministry to once again decrease interest rates. Competition for FX-denominated bills contributed to lower rates, as all demand is concentrated in one auction per month.
As a result, the cost of borrowing continues to decline, and very likely that will continue, especially for UAH-denominated bills.