To restore successful bond auctions after a month's break, the MoF had to increase interest rates and shorten maturities. However, this increase was replaced by decrease in rates yesterday, and an extension of maturities to 12 months. In total, yesterday, the MoF borrowed UAH21bn, including proceeds from FX-denominated bills and with limited offerings for some issues.
Yesterday, the MoF offered three-month and six-month bills with limits, just UAH1bn for each maturity. Demand exceeded the offer by a few times, but the Ministry did not cancel limits due to August's large debt burden and large repayments scheduled for July. It is better for the Ministry to sell longer maturities, preferably into next year, and finance the budget deficit.
By using limits, the MoF was able to decrease interest rates for short maturities. For three-month bills, as demand was four times larger than offering, both the cut-off and weighted-average rates decreased to 10.5% or 80bp and 76bp, respectively. The Ministry accepted only 11 out of 21 bids for this paper, probably some of them partially.
The decline in interest rates for the six-month instrument was less material. Demand was two times larger than the offering. Out of 15 bids received, the MoF rejected only four. As a result, the cut-off rate was down 28bp to 11% and the weighted-average rate declined 50bp to 10.78%.
Most of the proceeds in local currency were received from bills with maturities in February and May of next year, UAH6bn and UAH3.4bn, respectively. The MoF sold similar maturities last year, but under different demand and tight monetary policy conditions. But compared with December, rates declined a bit. For nine-month bills, the cut-off rate was set at 11%, while for the 12-month issue, it was set at 10.97%.
For USD-denominated bills, the decline in rates was less material. The cut-off rate decreased by 10bp to 3.4%, while the weighted-average rate slid 11bp to 3.39%.
The current market situation has become more positive for the government. Demand is for different maturities within one year. Sure, the ability to receive loans from the NBU is very important, but in recent weeks, banks took out loans in significantly lower amounts than what they bought in new government paper. Banks are not in a hurry to take loans, instead, they will use their own funds for bills' purchases. This week, we again expect low demand for loans. Later, however, we expect to see offerings of longer maturities at the auction, and likely a further decline in interest rates brought about by limited offered amounts.
