NBU's key policy rate hike last week to 7.5% brought with it an impact on rates in the primary bond market. Yesterday's auction was the first step toward a new level of the yield curve. Next week, the MoF will have to increase rates for other maturities that were not offered yesterday.
The largest increase in rates was at the short end for the three-month paper, which now has a rate of 8.5%. These bills were sold last time at 7.77%, or just 27bp above the new key policy rate. Banks expectedly were asking for at least a 100bp premium to NBU's seven-day CDs.
For the rest of the bonds offered yesterday, rates rose by 20-40bp, but demand was concentrated in the 11-month bills. For this paper, rates were up by 40bp to 11.15%, but this issue provided UAH4.4bn of proceeds out of a total of UAH4.6bn from the entire auction.
In general, the amount of budget financing has improved over the last two weeks. This can be the result of potential increases in rates and foreigners selling of local-currency bills in the secondary market at a slower pace. Likely, they purchased a small portion of new bonds yesterday, as they are interested in six-year paper at a slightly higher yield.
Therefore, we anticipate that next week, interest rates will continue to rise, but for maturities that were not offered yesterday. At least a large part of next week's redemption of UAH11bn needs to be refinanced, so according to the auction schedule, there will be a new compromise level of rates for six-month, two- and three-year instruments. They will move up to smooth the yield-curve after yesterday's increases.