Yesterday, the Ministry of Finance raised the interest rate on 12-month bills, which allowed them to increase borrowing in local currency to UAH1.9bn (US$65m). In addition, almost UAH1bn or US$32mn was raised through FX-denominated bills.
The offer of two-month paper in line with three-month and six-month securities was not enough incentive for investors to invest at 9.5‒10%. Part of the demand was at higher rates than before and was rejected. Therefore, only UAH149m (US$5m) was raised from these three instruments together, mainly through non-competitive bids.
For the 12-month paper, the Ministry of Finance likely indicated a possible increase in interest rates, so it received UAH5.5bn (US$187m) in demand. Such demand for this paper made it possible to receive almost UAH5.8bn (US$196m) of bids for local-currency bills at the auction. It was the largest volume of demand for UAH bills in the last two months.
Rates were in the range from 11% to 18% for 12-month paper, so the Ministry decided to increase the cut-off and the weighted average rates by 300bp up to 14% for both. At the same time, almost 2/3 of the demand was rejected and only UAH2bn (US$68m) of bills were sold for UAH1.8bn (US$60m) of budget proceeds.
The demand for FX-denominated bills fell tenfold, to US$32m from US$335m last week, while interest rates remained unchanged at 4% and 4.5% for five and 11 month maturities.
The MoF's selectivity in raising rates only for annual borrowings can be explained by the large volume of demand compared with other instruments. But this does not explain why the decision was to stop at 14%. The state budget could attract much more funds if the cut-off rate increased more than by 300bp, but the weighted average cost of the borrowings would increase much less. Therefore, the next auction in a week will allow us to assess the perspective and expediency of such a decision and a possible change in rates for other instruments.