Tuesday's auction, which was two days before the NBU key policy rate revision and a few days after November's reported inflation rate, saw large demand and provided the state budget with a lower cost of financing.
Demand was, as usual, concentrated in the longer maturities, the 2.6-year and four-year. Together, these notes received UAH13.4bn or 96% of total demand for the auction. The longer, the four-year note, received UAH11.4bn of demand or 81% of total demand. Certainly, it had a significant impact on the decline in interest rates.
Demand for five-month bills was low and was rejected due to quite high interest rates. But for 10-month bills, the MoF likely accepted one competitive bid and all non-competitive bids, receiving just UAH226m of proceeds. Cut-off and weighted-average rates were decreased by 75bp and 74bp respectively, compared with the auction a month ago.
For paper with a 2.6-year maturity, half of demand was accepted, and compared with the three-year notes sold in November, the cut-off rate was down 107bp to 12.05% and weighted-average rate by 106bp to 12.01%.
Rates for the four-year note were also slightly reduced. Compared with last week's 3.5-year notes, the cut-off rate was reduced by 80bp, and compared with the four-year note placement two weeks ago by 94bp. The weighted-average rate was decreased by 71bp compared with last week's auction. Of note, yesterday was the first time in the last four years that interest rates for local-currency paper declined below 12%.
Large demand and low caps caused the significant decline in interest rates, which is faster than NBU key policy rate decline. Currently, with inflation low at 5.1% and significant expectations of a sharp decline in the NBU key policy rate, demand at low rates was justified, but may subsequently lead to increased risks in attracting necessary budget financing.
