ICU Bond Market Insight: 18 January, 2023

Interest shifts to shorter instruments

After banks actively purchased 1.5-year bills that were allowed to be included in obligatory reserves, on 17 Jan. demand was focused on six-month paper, which brought in 71% of all budget proceeds from the auction held on Jan. 17.   

Obviously, for the Ministry, UAH20bn was optimal for the total amount of the first "reserve" issue. Therefore, after successfully reaching this volume, these bonds were not offered on 17 Jan. and are unlikely to be offered to the market in the future.

Despite last week's great demand and the possibility of attracting a large amount of funds to the budget, the Ministry of Finance is not likely to change its position.  

Instead, the Ministry of Finance offered the usual government bonds: two issues of military bills and two issues of ordinary (non-military) government securities.

Military bills received the greatest demand. There were 29 bids to purchase the issue with maturity in July this year for UAH4.2bn, and for paper due to in March next year, there were 13 bids for UAH1.4bn.

The demand for ordinary instruments was insignificant. This was probably because the Ministry of Finance satisfied most of last week’s bids for the "reserve" paper only partially, some of the participants decided to play it safe.

They submitted large bids with a rate of 75bp lower than last week. But there was no cap on 17 Jan, so the Ministry of Finance fully met all demand.

As a result, the weighted average rate decreased by 57bp to 13.43%, which could be an unpleasant surprise for participants with non-competitive bids (satisfied at the level of the weighted average rate), as non-competitive demand was almost 20%. 

The rate for 14-month military paper continued to fluctuate. At the end of 2022, it was reduced to 18.5%, but on 17 Jan. the Ministry of Finance agreed to return it to 19%, probably because the competitive demand was mainly with rates of 19%. 

The terms of ordinary bonds did not change, although a bid for UAH100m for 12-month government paper was rejected because it required an immediate rate increase by 650bp up to 25%.

The Ministry of Finance raised enough funds in total for the rollover of January repayments last week, so there was no special need to raise funds for this purpose on 17 Jan.

However, the budget always needs liquidity, and thanks to high demand, new borrowings will allow the Ministry of Finance to meet the financing needs of current expenses, albeit using short-term government securities.

That is why we see some flexibility on the issuer side along with a strategy, such as not raising rates significantly for a small volume of funds because they will not solve the needs of the state budget.