Bond Market Insight-Government bond auction results: Private placements prevail in the market

On 28 December the Ministry of Finance (MoF) again aborted its pre-scheduled weekly auction, due to the lack of interest on the part of buyers. Detailed data from the auction, in which the government planned to place three bonds due in 3, 9 months and 2 years, indicated that even investors showed no interest, so obvious was the outcome of the auction among the main buyers (banks and foreign investors who participate in this market). The certainty of such an outcome was evident from the general situation in the financial market, in the interbank market in particular, to which the season of high interest rates has returned, with the overnight Kyiv Prime reaching 4.4%. However, yesterday, the Ministry of Finance continued its series of extraordinary auctions which started last Friday and resumed this Monday and Tuesday. In total, on these three auctions, UAH1.4bn was attracted through placing the 1.5-year and 2-year bonds at a 10.0-10.1% yield range, which is lower than the secondary market yields on the bonds with a similar maturity. It is hard to judge the nature of these bonds, which were most likely purchased by the state banks at higher prices than would have been paid for by the market. Earlier, private placements of recapitalisation bonds had also been made, but with such common characteristics as tenor of not less than 6-7 years and coupon rate at the level of 9.5%. Tuesday\'s auction as well as previous auctions on Friday and Monday sold shorter-term papers.

However, if we look at the upcoming January-2011 auctions (see Table 1, page 3), then it becomes obvious that their schedule is rather intensive in terms of the need to refinance internal debt. For example, the government bond auction on 11 January will be held in light of the need for the MoF to redeem UAH1.1bn as interest and principal of bonds from earlier issues. Then, in the following two auctions in January, the total sum due for repayment to investors equals UAH2.5bn. Therefore, the primary bond market should become more optimistic in the first half of the next month.