Bond Market Insight-Government bond auction results: Nil demand at Tuesday\\\'s auction

According to the norm at the government bond auctions held during the last few weeks, the most successful day of the week for the MoF in terms of bringing in significant budget proceeds is apparently Thursday, while the traditional day for the auctions is Tuesday. Yesterday\\\'s auction results could be another confirmation of this trend.

After a successful auction last Thursday and speculative tone demonstrated last Friday, yesterday\\\'s auction could see attempts from the market side to fix the same level of interest rates reached last week through submitting bids with at least small volumes. However, yesterday saw no demand for ordinary bonds, which has become a usual occurrence, with lack of demand for USD-indexed bonds. As well.

In our view, the main reason for the lack of demand yesterday could be the low level of banking sector liquidity on Monday and its weak attempts to rise yesterday, as: (1) banks\\\' correspondent accounts with the NBU fell on Monday to UAH9.89bn and yesterday rose by only UAH0.81bn, to UAH10.7bn; (2) the current level of banks\\\' correspondent accounts with the NBU is insufficient for making mid-term or long-term investments, because it does not allow for the banks to make current payments, which has caused the significant increasing in interest rates on the money market for ON loans (the KyivPrime reached a new record high of the year, with the KyivPrime ON rate rising to 33.67% and the KyivPrime 1M rate rising to 33.17%).

At the same time, the canceling of yesterday\\\'s auction is not critical for the MoF, because last Friday, it realised significant proceeds from tax payments and the selling of bonds at last Thursday\\\'s auction. The interest and principal debt repayments scheduled for today amount to about UAH1.69bn, and will be the largest repayment during the next few weeks. The next significant debt repayment is scheduled for 14 December, 2011, at a total volume of UAH1.77bn.

Despite the above-mentioned, non-critical situation, the MoF will likely announce an auction for Thursday, to collect some funds and compensate for today\\\'s debt repayment, and to form reserves for December, but we do not expect significant demand for this auction.