Yesterday, the Ministry of Finance sharply increased the amount of borrowings to UAH16.8bn (US$589m). But to do this, it had to raise interest rates just as sharply for the UAH-denominated instruments. Actually, rates for all maturities are now in double-digits.
The largest increase was for four-month bills. Compared with 119-days bills, the shortest maturity sold at the beginning of November, yesterday's bills were three weeks longer, but interest rates were up 250bp to 10%. There was a chance to increase rates to only 9.5%, but as the weighted-average rate was set at 10%, too, the amount of demand at 9.5% was insufficient.
The increase in rates on six-month paper was half, just 125bp, as the cut-off and weighted-average rates were set at 10.25%.
However, for longer maturities, which have not seen single-digit rates for a long time, the increase in interest rates was less sizable. For 12-month paper, the cut-off rate was up 30bp to 10.8%, for two-year bills by 45bp to 11.4%, and for the 3.5-year note by 60bp to 11.7%.
Rates increased for EUR-denominated bills too, by 25bp to 2.45% compared with June 2020, when the same paper was sold.
Generally, this auction can be considered successful. When budget revenues and budget financing are weak, full refinancing of UAH-denominated repayments is a positive result. But the increase in rates was unprecedented. This summer, bills with three to six months maturities were sold at 7-8% and earlier this month at 7.5-9%.
With yesterday's decision, it looks like the MoF has entered into the final stage of this year's budget execution and is ready for a sharp increase in rates when they receive sizable demand. On one hand, this will allow the MoF to improve budget financing, but on the other, after yesterday's decision, it does not look like rates will return to single-digits very soon.
