Bond Market Insight-Government bond auction results: MoF gets funding mainly via the Euro-2012 bond

Yesterday\'s auction of government bonds brought no surprises, as the general level of yields did not change much from the previous week auction, when bonds of similar maturities were sold. However, it is worth mentioning that a 3-year bond\'s (the one issued to finance preparations for the Euro 2012 football tournament) yield contracted by 53bp, to 12.93% in a week. The MoF further tested the waters by offering a 5-year bond, for which market participants submitted bids for a total amount at par of UAH250m and yield range of 14-21%. Eventually, MoF placed a token volume of this 5-year paper of UAH1m with only one buyer, at a yield-to-maturity of 14.53%, i.e., at the highest price submitted yesterday for the bond.

Generally, the auction results did meet our expectations, and mirrored the results archived during the previous auction on 11 May. As in the past, the placement was made among quite a limited number of bid orders, which naturally provided the highest prices if compared to most other orders, which indicates that the MoF did not intend to raise the yield curve from its current comfort level. Out of a total of 54 orders at the auction, only eight made it through to the placement stage, i.e., were accepted by the MoF. The ratio that shows how many times the total volume of orders (at par value of the bonds) exceeded the volume of placed bonds (at par) was at 3.2x yesterday. This indicates, firstly, the MoF\'s reluctance to accept orders with lower prices; and secondly, that a wide circle of market participants require a bit higher yield as compensation for their risk. Taking a closer look at the nature of bonds sold, it appeared that a large chunk of proceeds (96% of the total) yesterday were from selling the Euro 2012 bond, which enjoys special treatment by the central bank with regard to commercial banks\' assets.

Going forward, it is likely that during next four weeks or so, the primary bond market for government bonds will remain somewhat subdued, in the market\'s anticipation of a VAT bond issue in the second half of June and sizable bond redemptions in local currency (UAH2.8bn) due at that time as well.