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. Last Updated: 07/27/2016

Treasury Bill Demand Slows

The Finance Ministry has announced only a modest increase in its sales of treasury bills for this month, reacting to slower growth in demand for government securities.

The ministry said it plans to issue only 130 billion rubles in three-month treasury bills at its Jan. 18 monthly auction, an increase of only 10 million rubles from its last auction in December.

The small increase marks a retreat for the ministry which has been trying to increase bond sales rapidly. It has turned to the bonds to finance the budget deficit, looking for an alternative to artificial, inflationary Central Bank credits.

The ministry was able to more than double the size of its bond issues in both its November and December auctions.

The government has also indicated it will not issue six-month treasury bills in January, a new financial instrument it launched last month.

Alexander Sarchev, a securities expert at the Moscow Interbank Currency Exchange, where the bills are traded, attributed the reduced demand to this week's fall in the ruble exchange rate, combined with a cash crisis among commercial banks and enterprises.

Sarchev said that the ruble's fall to 1,335 per dollar, down 7 percent in a week, has attracted speculative money away from the bond market into hard currency.

He said that commercial banks and enterprises have fewer liquid assets to invest after paying taxes and settling accounts at the end of 1993.

All this added up to fewer orders from the 27 banks and single broker -- Russian Brokerage House -- authorized to trade in the bonds, Sarchev said. The Finance Ministry decides how many bonds to issue at each monthly auction according to orders that buyers place two weeks in advance.

Sarchev also said that the market for government bonds has developed to the point that secondary trade draws demand away from primary auctions.

"The December auction showed that at certain moments it is possible to buy government bonds on the secondary market cheaper than on the primary market," he said.

When the auctions began last year, the bonds' prices inevitably jumped on the secondary market due to demand from buyers who did not know what price to offer at primary auctions.

Now, however, buyers tend to set the price they are willing to pay for government bonds according to prevailing interest rates that banks offer each other on the interbank credit market, Sarchev said.

"When interest rates rise on the interbank market, the price of government bonds falls at auction," he said.

The present interbank rate for 30-day credit is about 175 percent annually, while the annual yield of the government's last bond issue was 169.20 percent. Yield is calculated according to the price paid at auction: the less a buyer pays for a bond, the higher the yield.

Asked if the handful of banks that presently control the interbank credit market could thus artificially influence the yield of government bonds, Sarchev said only "that's not impossible."