Bond Analytics: Larger and cheaper borrowings

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.

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Official results on issuance of domestic bonds