The yield curve continued to flatten at yesterday's primary auction; it is now slightly above 10% between the six-month and three-year maturities. But this did not prevent the MoF from borrowing a bit more than UAH6.3bn (US$260m).
Demand for the six-month bills exceeded the offered amount by more than six times, but MoF accepted only six out of 28 bids, which had interest rates not higher than 10.04%, setting weighted-average rate at 10.03% while the lowest rate in bids was at 10.0%.Compared with auctions at the end of last year, the decline was sufficient: the cut-off rate declined by 176bp and weighted-average rate by 172bp.
Fourteen-month bills with maturity next March also saw large demand, similar to last week's amount, but rates slightly declined. The lowest rate in bids for this instrument was 9.7% or 25bp lower than last week. The highest bid-at 10.75%-declined 135bp from last week's auction. Most of bids were rejected. Out of 29 bids, the MoF accepted only 13 with rates not higher than 10.15%. As the result, the cut-off rate declined by 29bp to 10.15% and weighted-average rate by 14bp to 10.04%.
Demand was lower for the three-year note than the offered amount, just UAH3.6bn vs UAH4bn. With this demand, the MoF decided to reject some bids due to high interest rates, although the highest rate was 10.75% or 100bp lower than the highest rate for two-year bills last week. Accepting 21 bids, the Ministry set the cut-off rate at 10.15%, the same as for the 14-month bills, and weighted-average rate at 10.01%. These rates were lower than for similar paper at the end of last year, by 85bp and 99bp, respectively.
In this auction, the MoF borrowed UAH6.3bn and was able to flatten the yield curve, especially for bills from six months and up to three years, which currently are slightly above the psychological level of 10%. This level seems to be very close to the lowest level for such maturities, and probably notes with four and more years to maturity could see large demand with interest rates below 10% to set cut-off rates lower.
Generally, current conditions seems to have put rates very close to the bottom, and a further decline in the NBU key policy rate will not have significant impact, especially at the long end of yield curve, where demand is mostly seen from foreign investors.