Bond Market Insight-Government bond auction results: MoF accepts only non-market bids

Yesterday, the MoF likely accepted only non-market bids for the 3-year bond re-opening, most probably submitted by the Deposits Guarantee fund and one or two state-owned banks. Two non-competitive bids could also have been submitted.

The above results were determined from the auction results, in which the most demand was concentrated on the 3-year bond placement, at UAH167.0m, was made up of four bids, of which the MoF accepted three at a total volume of UAH162.0m at par value, realising UAH165.49m in budget proceeds.

However, market demand yesterday saw a total of six bids, excluding the 5-year bond, which did not attract any bids. Three non-market bids were accepted, and another three under market rates. Bids were submitted at UAH5.0m each, with rates ranging between 12.0% and 15.0% for the 6-month and 3-year bonds, respectively. In addition, market rates were significantly higher than accepted bids: (1) the 1Y NDF implied yield last week significantly rose above 21.0%; VAT-bonds quotations were above 14.0%; and (3) the YTM of bonds maturing on 28 January, 2015 was last above 15.0%.

Therefore, yesterday\'s significant volume of local-currency bonds sold at a rate of 10.0% appears to be the result of demand from the Deposits Guarantee Fund that was met, as a week ago, its non-competitive bid, at a total volume of UAH150.0m, was not accepted.

In other news, yesterday, the MoF once more demonstrated its unwillingness to keep in step with the market by failing to indicate its readiness to realise budget proceeds at the next auction to refinance part of the largest debt principal and interest repayments of the year to date, at a total volume of UAH4.93bn.

Therefore, next week, we should see the same auction results as today, with the MoF accepting friendly bids, the volume of which could rise, depending on the debt repayment volume. But, we should not see rates increasing or any significant changes in rates.

The MoF\'s efforts to hold the primary market rates at a very low level could be a further indication about the possibility of using FX funds collected on the government accounts, at a total volume UAH25.0bn, to repay domestic debt this year. The absence in the draft of state budget for 2012 of the VTB loan redemption of US$2.0bn may be a result of preparation for new Eurobonds issues very soon.