Bond Market Insight-Government bond auction results: Euro-2012 bond in the spotlight

The central bank\'s recently adopted resolution of 20 April, 2010 on new measures to set aside required reserves by commercial banks depending upon their liabilities, which takes effect on 1 May 1, has provided the MoF with additional power to attract more funds from the local market. Yesterday\'s volume of proceeds from government bonds to investors rose by more than 2x, to UAH2.8bn, compared to the previous auction. In addition, the yield curve has shifted downward: yields on ordinary bonds have moved more toward the shorter end of the curve, dropping by 0.2-0.5bp, while on the far end of the curve, yield contraction on the same ordinary bonds was a much milder 9bp. In this respect, a special bond due on 20 March, 2013, issued by the government to finance preparations for the Euro-2012 football tournament was sold at a yield of 13.6%, significantly lower than the yield level on an ordinary bond with a similar maturity date (see chart on lower right).

The key features of the central bank resolution that changes the landscape of commercial banks\' motivations with regard to local currency bonds are, firstly, transferring 100% of required reserves to special accounts at the central bank; and secondly, the possibility for a commercial bank to include its assets in the required reserves, placed into the special bond issues, proceeds from which are to be used by the government to finance Euro-2012 preparations. This precipitated the issue of a bond due on 20 March, 2013, i.e., the so-called Euro-2012 bond, which attracted UAH1.3bn of proceeds, or a 46.4% share of the total proceeds the MoF realised yesterday. Prior to yesterday\'s auction, MoF has raised just UAH1.4bn from selling the Euro-2012 bonds since September 2009, when the bonds were first offered at the auctions.

The aggregate results from yesterday\'s auction confirmed that the downward trend of the yield curve and extension of the average life of the local currency tradable debt has extended. The effective yield-to-maturity of the auction (calculated taking into account all the cash flow from bonds sold yesterday) amounted to 13.81%, down 55bp from 14.37% a week ago. At the same time, the effective duration rose to 1.63 years from 1.32 last week.