Bond Market Insight-Government bond auction results: MoF\'s and market\'s expectations differ

Yesterdays auction\'s results followed the norm for the last few months and were canceled. The main reason for the auction canceling were the differences between the MoF\'s and the market expectations. The low volume of demand exacerbated the situation.

For yesterday\'s auction, only two bids were submitted, at a total volume of UAH31.0m, with rates ranging between 11.0% and 11.25%. Under these rates, investors were willing to buy only the 12-month zero-coupon bond.

We did not see demand for this bond during August, and in July, bids were submitted with rates ranging between 8.3% and 9.75%. The last time this bond was sold on 21 June, 2011, when budget saw proceeds at a total volume of UAH65.05m from the bond selling at a rate of 7.95%. We see the following reasons for the low demand. Firstly, we should mention the lack of demand from non-residents, which significantly reduced their local-currency bonds portfolio in August by UAH1.98bn, and by UAH150.0m since the beginning of September. They could return to the local market and likely increase their investments in local-currency bonds if bonds the YTM could cover the FX risks: yesterday, the 1Y NDF implied yield rose to at least 15.0%.

The second key reason is the low level of banking sector liquidity: the NBU has significantly tightened liquidity, and is not going to make any large inflows. Banks\' correspondent accounts with the NBU were at UAH14.24bn yesterday.

The third reason for the demand decreasing to very low volumes is the very low level of cut-off rates and the MoF\'s unwillingness to increase the rate to cover bank\'s expenses to raise funds.

At the moment, lack of demand is a natural phenomenon, and over the next two weeks, we do not expect demand to rise significantly. The next auction, could attract larger demand because of the large debt repayment, but in any case, it will be insignificant.

Only the MoF can solve the problem with low demand, by slightly increasing cut-off rates to get budget proceeds in local currency. At the same time, we have noticed that the government collected UAH35.6bn in its accounts in local and foreign currencies, and this backlog is likely enough to cover all debt repayment expenses, but only if the VTB loan is extended till June, 2012.