Government bond auction results: MoF not motivated to borrow at costly rates

As on last Thursday, the MoF yesterday collected fewer bids and volume of demand than on Tuesday, as only two bids were submitted, and the total volume of demand amounted to only UAH30.0m.

Demand from participants at yesterday\'s auction was seen in the 12-month, zero-coupon bond with maturity on 9 January, 2013, and the 1.5-year, USD-indexed bond. The bonds received only one bid each, but demand for the 12-month bond was at a total volume of UAH20.0m, while the USD-indexed bond received half of that volume, at UAH10.0m.

The level of interest rates on bids yesterday was significantly different from those accepted by the MoF last week. For the 12-month bonds which the MoF sold twice last week: last Tuesday, the MoF sold these bonds at a rate of 14.75%, and last Thursday, the bonds were sold at a rate of 13.5%, while this past Tuesday, interest rates on submitted bids ranged between 14.0% and 17.5% and were rejected by the MoF, and yesterday, interest rates on submitted bid was at 16.0%.

Participants of yesterday\'s auction were ready to buy USD-indexed bonds with bids submitted at a rate of 10.25%, or 25bp lower than on Tuesday, but the MoF decided that this level was too high for the very small volume seen for the 1.5 year.

As a result, yesterday\'s auction was canceled without any proceeds, and all bids were rejected, and it was the third auction in a row which the MoF held on Thursday that received, as expected, very low demand compared with auctions held each Tuesday. Likely, the market is lackadaisical after the auctions held by the MoF every day at the end of last year, and YTMs on the secondary market are higher than the MoF is willing to accept, thus not providing great incentive for investor participation.

Next Tuesday, we should see higher activity than yesterday, but this activity will be tempered by a decline in banking sector liquidity, which is expected after the payments of corporate tax, VAT, and other taxes which have to be paid by next Monday.
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