Bond Market Insight-Government bond auction results: MoF once again walks away

Yesterday, the Ministry of Finance once again walked away from the government bond auction unwilling to accept bids with interest rates above its desired and preferred level, which was reached in the early part of November.

In short, the auction yesterday garnered 19 bid orders for three bonds offered by the MoF, with the range of yields sought after by the bidders as follows: buyers of the 3-month discount bill indicated a 8.49-9.00% yield range; those seeking to buy the 9-month discount bond indicated a 9.00-9.99% range; and prospective buyers of the 2-year bond were looking for a yield in the 11.50-12.74% YTM range. The total volume of bids amounted to UAH495m, up from UAH400m a week ago.

A comparable analysis of bids submitted yesterday to those submitted at the two previous auctions shows that the bids for the short-dated bond of 3-month tenor were 1.5ppts higher yield-wise than the yields sought after by prospective buyers of the same bond at the auction two weeks ago (at which time the range in yield for the 3-month note was at 7.00-7.50%). The 9-month discount bond saw a 0.5ppt increase in yield over the last time a bond with the same tenor was offered, at the auction two weeks ago.

In general, the last two auctions, in which the MoF failed in its bidding to sell government debt to the market, were carried out in quite tense market conditions. Thus, despite the fact that the banking sector\'s short-term liquidity improved by more than UAH2bn during the last week, if measured by total volume of funds held by banks at their correspondent accounts with the central bank, this did not ease money market rates, where overnight funds rate remained at 2.6%, the same level as a week ago (whereas previously, the rate tended to be closer to 1%). In the financial markets abroad, investor sentiment towards Ukraine deteriorated on the back of the worsening debt crisis among the financially weaker members of the Eurozone.

The MoF\'s reluctance to bow to market demands to raise the yield on its debt speaks volumes about the government\'s view that there is going to be a turnaround in this recent trend in the second half of December, as banking sector liquidity is expected to further improve (thanks to sizable redemptions of the NBU\'s certificates of deposits) and due to the decision by the IMF to disburse the second tranche of its loan.