Bond Market Insight-Government bond auction results: MoF forgoes auction, signalling no need for costly funds

The significant decrease in banking sector liquidity during the last two weeks had a direct impact on the government bond auction yesterday. There was no sizable demand seen yesterday, however, and also, no sign of a decrease in yields in the submitted bids. Instead, yields in the bid orders submitted for this auction rose sharply compared to previous auctions. In total, the auction collected only 10 bids at a total volume of UAH483.3m, with yields ranging from 7.8% to 12.0%. In the end, the MoF rejected all the bids and cancelled the auction altogether. As we expected, major demand was focused on the re-opening of the 2-year bond, which received four bids at a total volume of UAH341.3m, with yields ranging from 9.5% to 12.0%, which was 50-150bp higher than a week ago.

The offering of other bonds and demand for them to a broad extent was quite similar to the above-mentioned offering of the 2-year bond. Demand for the bond with maturity on 29 February, 2012 was 4x less than for the 2-year bond at, a total volume of UAH92.0m. Yields for the five bids submitted for this bond ranged from 7.8% to 9.4%, which was 55-115bp higher than demand for the same bond with a maturity that was shorter by seven days.

Usually, bonds with the shortest maturity, which yesterday was 182 days, collect the smallest number of bids and total volume of demand. For the above-mentioned bond, only one bid was submitted yesterday, at a total volume of UAH50m and a yield of 8.95%, which was higher than for the similar bond on 17 May, 2011. Two weeks ago, MoF sold a similar bond with 147 days\' maturity at a rate of 6.00%, or 295bp less. The increased yield levels in the submitted bids is a direct result of activity by the MoF, which over the last two weeks, collected taxes and accumulated revenues on the single treasury account but was slow to disburse the funds back into the banking system as budgetary expenses. As the result, banking sector liquidity significant decreased, impacting money market conditions and resulting in the KyivPrime ON rate increasing to 11.38% yesterday.

Domestic debt interest payments scheduled for today and 8 June, 2011 amounted to UAH90.0m and UAH230.0m, respectively. And, judging from the performance of the state budget, which is better than the previous expectations by the government, it will be easy for the MoF to make these payments. Despite no sizable debt repayments falling due next week, the MoF will hold an auction according to schedule, but we do not expect high demand during the next auction, while interest rates required by the buyers will not come back down to the yield levels seen in the recent past few weeks.