ICU Weekly Insight, 4 October 2023 - Higher Borrowings at Lower Rates

Demand for UAH bonds at yesterday's auction increased significantly compared with last week, activating caps and lowering interest rates for 12-month bills.

For the first time in more than three months during which the Ministry of Finance has been placing bills maturing in October of next year, demand exceeded the cap set by the MoF. The total bid amount exceeded UAH5.2bn, which was UAH1.2bn more than the cap. So, the MoF accepted all non-competitive bids and part of competitive demand within the cap at 17.55%. Since this interest rate was the minimum yesterday, all competitive bids with such a rate were satisfied partially, within the limit and in proportion to their size. Accordingly, the cut-off rate decreased by 20bp, and the weighted average by 13bp, while the MoF rejected bids with interest rates above 17.55%.

Demand exceeded supply for reserve notes, too. The total amount of bids was UAH5.3bn, while the cap was at UAH5bn. Therefore, non-competitive bids were fully satisfied since their volume was less than UAH1bn, and the MoF used the rest of the cap to satisfy competitive demand. The cut-off and weighted average rates were unchanged from last week at 19.2% and 19.19%, respectively. The MoF rejected the demand of UAH298.5m due to the partial satisfaction of bids with the maximum rate.

Only demand for 1.5-year military bills was less than the supply: UAH2.5bn vs UAH4bn cap. But compared with last week, demand was unanimous. Rates did not exceed the cut-off rate of the previous auction, 18.35%, and the minimum rate increased by 65bp to 18.15%. As a result, the cut-off rate remained at 18.35%, and the weighted average at 18.34%.

Demand at the auction more than quadrupled, and in part, this may be a delayed reinvestment of the last week's redemption. Also, banks could increase the purchase of reserve securities, anticipating that next week, the Ministry of Finance may offer new, even longer paper, which the NBU will allow banks to use for covering reserves later.

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Research team: Taras Kotovych.

See the full report here.