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Finance Ministry scores clear victory in American-style auctions

The auctions of Slovak government bonds were the most closely monitored events during the last few weeks on Slovak financial markets.
The Finance Ministry broke tradition by setting a maximum amount and a minimum price for its one-year state bond auction on March 11. The ministry set the maximum bids they would accept at or above the par value with a set 17% coupon. Later, the ministry confirmed its intention to continue with its new, American-style method of conducting state bond auctions.
Dealers had been sceptical as to whether the yield would be high enough to attract bids. However this new style was welcomed as the market had long been calling for greater predictability and transparency in the ministry's debt management.

The auctions of Slovak government bonds were the most closely monitored events during the last few weeks on Slovak financial markets.

The Finance Ministry broke tradition by setting a maximum amount and a minimum price for its one-year state bond auction on March 11. The ministry set the maximum bids they would accept at or above the par value with a set 17% coupon. Later, the ministry confirmed its intention to continue with its new, American-style method of conducting state bond auctions.

Dealers had been sceptical as to whether the yield would be high enough to attract bids. However this new style was welcomed as the market had long been calling for greater predictability and transparency in the ministry's debt management.

The one-year bond auction on March 11 attracted bids worth 3.59 billion Slovak crowns, with an average yield of 16.997%. In the next, even more closely watched three-year bond auction with maximum yield set at surprisingly low levels - 16.8% - the ministry got 3.37 billion crowns. This was a clear success for the ministry, and the market now sees room for further reductions in maximum yields.

The maximum yield for the next two-year bond issue will be 16.3%.

The central bank's effort to sterilise the surplus of short-term funds in the banking sector through mainly individual repo-tenders helped to stabilise money market interest rates. The central bank, with the help of the Finance Ministry, succeeded in stabilising the market and calming its high volatility for the time being.

Interest rates on the money market showed only minor moves during the past two weeks, a great change from the volatile times we have seen on the market for the past several months. The longer tenors quoted on the money market experienced a slight decline with 6 month funds offered below 16%; the shortest-term rates moved a little above 11% on March 24.

On the foreign exchange market, the Slovak crown did not experience another wave of weakening, but the currency remained clearly vulnerable. The EUR-SKK exchange rate floated between 44.300 and 44.850, and these levels are considered as a strong resist-support for the crown.

The local currency was affected by the general weakening in the region due to the recent flurry of poor macroeconomic data mainly from the Czech Republic and Poland.

Nevertheless, Slovakia's fundamentals remain poor, and even if the government is exceptionally prudent in its economic policy, the currency is most likely to weaken throughout this year.

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