Yesterday, the MoF took an important step toward meeting prevailing market sentiment and accepted an increase in interest rates.
The Ministry increased rates for the 2.5-year bills, where demand was seen in the range of 10.25-10.5%. The Ministry either had to increase rates or cancel the auction. The second part of this decision was how to increase the rates so that it was rational. Taking into the account the weighted-average rate and low amount of non-competitive demand, demand was concentrated mostly at 10.5%.
Therefore, the Ministry took a step towards the market, and accepted an increase in rates for this issue. The cut-off rate was increased by 50bp to 10.50%, and weighted-average rate was up 46bp to 10.46%. It was unexpected, but this move brought rates a bit closer to the secondary market. Distributed between all bidders, the budget received UAH657m of proceeds (US$24m).
However, for 13-month bills the Ministry decided not to change rates and keep them at the same level as a week before. Last week, the Ministry increased rates for this issue by 9bp to 9.29%, and despite the huge demand received yesterday, they did not increase rates. Total demand for this maturity was almost UAH800m (US$29m), where just one bid had a rate above last week's cut-off level. That bid amounted to UAH500m (US$18m) with 12.5% rate.
As a result, all the instruments sold after the lockdown started now are on a normally shaped yield curve in the primary market. The 2.5-year rate is now above rate for 1.5-year, which was sold a month ago at 10.25%. The shape of the yield curve now ranges from 7% for three-month bills up to 10.50% for 2.5-year instruments. Therefore, we do not expect a further increase in rates any time soon.
