Bond Market Insight-Government bond auction results: yield curve intact

Yesterday\'s government bond auction failed to produce a significant shift in the primary market\'s local currency yield curve (see the chart on right).

At the far end of the curve, where the Euro-2012 bond due in 2013 is situated, a fixing of yield at 12.93% YTM was replicated from previous auctions. At today\'s auction, all six bidders who participated in the bond placement submitted their buy orders at the same level, which was eventually accepted by the MoF (12.93% of effective YTM).

At the short end of the curve, where the heaviest purchases of government bond took place yesterday, bringing in a total of UAH784m, or more than 70% of the total proceeds for the day into the state coffers, the placement of a 3-month bond took place at weighted-average yield of 7.31%. There were 26 bids submitted for the auctioning of the 3-month bill, with total volume at par amounting to UAH868m and a yield range of 6.5-8.5% YTM. As the MoF set the cut-off price for the bond with a corresponding yield of 7.5%, this indicates that some buyers parked their cash in the bill at with a 6.5% yield.

The fact that the MoF has been raising funds predominantly from the short end of the yield curve shows that investors\' perception of sovereign credit risk is that it is still high. An extension of the average duration of the government\'s local currency debt is not happening. And, the government\'s reliance on the local bank sector liquidity as a funding source (apparently a source of short-term funds only) is a risky strategy in the long run.

Despite the fact that the yield curve, as implied from yesterday\'s auction, remained intact across the terms of all placed bonds, if compared to the yield curve implied from the prices and maturities from the previous auction, there was a sign of further pressuring from the MoF on interest rates; the last time the MoF sold a bill with a tenor below the 3-month threshold was at the 6 July auction, at which time, the MoF\'s cut-off price for the placement of a 71-day bill was a at 7.5% yield. Yesterday, however, the same cut-off level (7.5%) was applied to a bill with a 91-day tenor.