October ends with large debt payments and only partial refinancing. Over the past week and today, much more was repaid in debt principal than was borrowed for the budget.
In terms of hryvnia repayments, 96% of redemptions were refinanced in October, which is not the worst monthly indicator this year. But in hard currency, it is a little worse, because only 65% of repayments this month were refinanced.
So yesterday, overall demand, expectedly, grew, reaching almost UAH18bn, which includes FX-denominated paper. Of course, the demand for USD-denominated bills prevailed, amounting to almost UAH11bn (US$409m), but UAH-denominated securities were also popular.
Investors were most interested in bonds maturing in August 2022, in November 2023, and in May 2027. Foreigners likely participated in buying bonds maturing in 2027.
Although the NBU maintained the key policy rate at 8.5% last week, this auction was not without a rise in interest rates. Market participants were not aggressive, but they did want higher interest rates and mostly demand was with slightly higher rates. Therefore, the Ministry had to meet this demand for UAH-denominated bills with maturities from two to six years and increase the cut-off rates by 6-8bp. In particular, for two-year bills by 7bp up to 12.47%, for the three-year note by 8bp up to 12.57%, and for six-year paper by 6bp up to 13.1%.
The Ministry of Finance is trying to refrain from a sharp rise in interest rates, but net financing of the state budget for hryvnia bonds remains low. Since the beginning of the year, borrowings in hryvnia have exceeded redemptions in the local currency by less than UAH10bn, while the budget law included a much larger difference. According to our estimates, borrowings in local currency should exceed redemptions by more than UAH100bn. This increases risk that MoF will have to borrow a lot to cover the budget deficit at the end of the year.