ICU Weekly Insight, 20 September 2023 - Marginal Changes in Interest Rates

After repaying US$380m last week, the MoF had to raise at least US$120m to keep the USD-denominated redemptions refinancing rate at 100%. The MoF offered the same military bills as last week, but with US$200m (par value) cap. Demand for this instrument amounted to almost US$300m, so the Ministry decided to use the "residual" method of satisfying bids: 30% of the cap was used for partial and proportional satisfaction of non-competitive bids, competitive bids with rates below the maximum were satisfied in full, and the rest of the volume was distributed proportionally among participants whose bids were at the maximum rate. Interest rates in bids ranged from 4.68% to 4.8%. So, in the end, the budget received US$191m, which was more than enough to refinance all USD-denominated redemptions in September.

 Although there will be no EUR-denominated redemptions until the end of the year, the MoF offered EUR50m bills yesterday. The volume of demand was EUR70m. Non-competitive demand was fully satisfied, but, again, the competitive bids had to be partially accepted, distributing a part of the bonds among the participants in proportion to the size of the bids, as MoF did with the USD-denominated paper.

 At the same time, all UAH instruments received less demand yesterday than the caps. The MoF offered regular and military bills for UAH4bn each and "reserve" notes for UAH5bn. Therefore, applying the principle of residual bid satisfaction for UAH bonds was unnecessary. However, three bids were rejected.

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 Twelve-month bills received 12 bids with rates from 17% to 17.8% (the maximum rate last week). The MoF rejected two bids for UAH10m, setting the cut-off rate at 17.78% (down 2bp) and the weighted average at 17.65% (down 15bp from last week).

 Demand for 1.5-year "military" bills declined to UAH2bn, but most were with rates at the cut-off level of the previous auction, 18.35%. Therefore, the MoF kept the cut-off rate at 18.35%, but because the minimum rate was 15bp lower than last week, the weighted average rate decreased by 3bp to 18.31%.

 Demand for "reserve" notes was, for the most part, similar to last week: interest rates in competitive bids ranged from 19% to 19.20%. The MoF rejected only one bid for UAH70m with an interest rate of 19.9%. So, as a result, the MoF accepted demand with a cut-off rate 19.2% and a weighted average rate of 19.19%, the same as last week.

 Yesterday's bidders were in no rush to lower interest rates on UAH bonds, just as the MoF was in no hurry to raise interest rates in June 2022 after the NBU increased the key policy rate to 25%. So, bond interest rates spread to the key policy rate in tightening, but interest rates are still lower than the key rate, having room for slight decline.

Research team: Taras Kotovych.

See the full report here.