Bond Market Insight-Government bond auction results: Demand and yields slide in tandem

The recent decrease in banking sector liquidity reflected on the total volume of demand at yesterday\'s auction, which decreased to UAH1.3bn, down 2x compared with the two previous auctions, which saw demand of UAH2.5bn and UAH3.0bn, respectively.

At the same time, yields reacted to a lesser extent from the liquidity issue, with the lowest yields in the submitted bids declining by only 25bp. The decline in demand as well as yields contraction nevertheless allowed the MoF to realise UAH544.8m in proceeds from yesterday\'s placement and a sizable amount of funds to fully refinance the interest and principal payments falling due today, amounting to UAH264.1m.

The highest level of demand targeted the 2-year bond placement with maturity on 22 May, 2013: in total, 19 bids were submitted, with a total volume of UAH810m. This placement comprised the majority of the total proceeds; the MoF accepted four bids and sold bonds at a total volume of UAH525m, which included UAH450m in bonds sold by non-competitive bids. The MoF accepted bids at the lowest level of 9.0%, or 25bp less than on 10 May, 2011. There was only one bid submitted for the shortest bond, with maturity on 10 August, 2011 and volume of UAH20m, at a rate of 4.75%, or 25bp less than two weeks ago, and it was accepted by the MoF.

The bond with maturity on 15 February, 2012 saw eight bids, at a total volume of UAH425m, with rates ranging from 7.25% to 8.25%, but this placement was canceled, possibly due to the small volume amount indicated for it, in spite of decreasing its yield by 15bp compared with the primary placement of this bond which took place on 10 May 2011. At the same time, yesterday, the highest rate in the submitted bids was 50bp higher than two weeks ago.

Placement of the amortised bond, which MoF announces only once every month, was canceled as usual, as it saw very small demand on yesterday as well as on every past auction. Yesterday, two bids were submitted to buy the amortised bond, with total volume of UAH20m and a 12.0-12.5% yield range.

Next week, the MoF will propose an unusual set of bonds to the market: short-term bonds with 6- and 9-month maturities, and a 2-year, mid-term bond. An increase in banking sector liquidity after the tax payments last week could continue pushing down yields, and minor interest payments will create the possibility for the MoF to continue to use market conditions and further reduce yields.