Yield curve of Hr-denominated domestic government bonds placed at past two auctions.
On Wednesday, July 6, the Ministry of Finance raised only Hr 128m ($4m) for the state budget, accepting less than 5% of the demand it received out of the total volume of bids for Hr 2.9bn ($99m). It was the first auction after the NBU key policy rate increase that investors could send bids with a “wished-for” interest rate.
This auction provided the Ministry of Finance with an understanding of the yield curve that is expected by banks and other investors and, accordingly, it gave them perspective on the amount of possible borrowings at such interest rates.
Unfortunately, the published results provide only the maximum level of interest rates in submitted bids and not the range of interest rates in rejected bids.
So, for the new three-month bill issue, demand reached Hr 2.3bn ($77m), but only Hr 84m ($3m) of bids were with a rate of 9.5% or non-competitive. Seven bids for almost Hr 2.2bn ($74m) were rejected with rates higher than 9.5% and up to 23.5%.Demand for semi-annual paper exceeded Hr 0.6bn ($21m), but only Hr 14.4m ($0.5m) of bids were accepted at a rate of 10%.
Three bids with rates up to 22% in the amount of Hr 600m ($20m) were rejected.
But for annual bills, which the Ministry of Finance offered again after a two-month break, the maximum interest rate in demand was even lower. The highest rate in bids was 20%, but demand was already lower than for shorter maturities. In total, Hr 41m ($1.4m) of bids were received, of which Hr 36m ($1.2m) were satisfied at the usual level of 11%.
The only T-bill issue that showed the full range of desired rates was the two-year instrument, which was being offered for the first time since the full-scale Russian invasion.
Investors were looking for a coupon rate at the level of 15‒18%, which is significantly less than the rate they wanted for three-month paper. But demand for this instrument was the smallest yesterday, just Hr 5.2m ($0.2m). Therefore, the Ministry of Finance decided not to accept these bids at all.
In this auction, investors signalled to the Ministry of Finance the range of interest rates they are looking for, which will establish the yield curve for the entire market and a possible maximum level for local-currency bonds on the primary market.
For short-term paper, the market will accept a rate as high as 23.5%, or 150bp below the NBU key policy rate and only 50bp above the rate for NBU CDs. The market sees lower rates for longer bonds: 22% for six-month bills, 20% for 12-month paper, and 15‒18% for two-year instruments.
Such bids indicate the market’s expectation that the NBU will move quickly to lower the key policy rate in about six months. So, based on indications on Wednesday, July 6, we may see slightly higher rates for bills on the primary market next week.
RESEARCH TEAM Taras Kotovych
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