ICU Bond Market Insight: August 17, 2022 – KyivPost

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Borrowings are at a minimum

The Ministry of Finance again refused to revise interest rates on military government bills. Consequently, they have attracted the smallest amount of funds since military bills were first proposed in March this year.

Demand at the auction was over UAH 1.2 billion (US$34 million) (nominal), but at rates that were in bids last week of UAH 72 million (2 million US dollars). Two offers totaling more than one billion hryvnias did not fall within this framework.

Last Tuesday’s increase in the five-month paper rate by 200bp to 12% did not increase demand. Instead, demand decreased 100 times to 35 million UAH ($1 million), providing the state budget with only 33.4 million UAH ($0.9 million). The offer of 14-month vouchers at a rate of 16%, which brought in 32 million UAH (0.9 million dollars) to the budget, went about the same way. With these two bond issues, the ministry satisfied all the offers.

For 11-month securities, although demand was greatest at almost UAH 1.2 billion ($32 million), it included rates above 14% and up to 20% in two offers out of 10. Therefore, the Ministry of Finance decided not to accept these two offers and to limit the amount of loans to 6.1 million UAH (0.2 million dollars).

The Ministry of Finance borrowed the smallest amount in local currency as early as mid-February, shortly before the full-scale Russian invasion, when market participants were worried about the news and were in no rush to buy new obligations.

Yesterday’s auction was a glaring demonstration of the exhaustion of demand for military bonds at the rates desired by the Treasury. The free liquidity is directed to the secondary market, where bonds with a much higher yield and greater variability in terms of circulation are now available.

Thus, keeping rates unchanged in the primary market may limit the Ministry of Finance from attracting funds in very small amounts. This will require either seeking additional support from the National Bank of Ukraine, or the Ministry of Finance will have to revise interest rates to bring them closer to the secondary market for ordinary, non-military government bonds.

RESEARCH TEAM: Taras Kotovych

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