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. Last Updated: 07/27/2016

Flush Market Sinks T-Bill Yields

An abundance of rubles in the market on the eve of new access for foreigners helped force down yields on government treasuries Wednesday, easing the stranglehold on the federal budget brought by recent sky-high borrowing costs.

Demand was huge at the weekly primary auction for three- and six-month T-bills, or GKOs. Dealers bid for more than twice the amount on offer of the three-month bonds and heavily oversubscribed the longer-term paper.

"It's very good news for the government," said Dmitry Falkovich, a fixed income trader and analyst at Alliance-Menatep.

Lower yields means it costs the cash-strapped government less to raise funds in the T-bill market.

Yields fell to 63.86 percent on three-month bonds and 80.4 percent on six-month GKOs.

"These are the lowest yields we've seen in a couple of weeks," Falkovich said. "There was a tremendous amount of money on reserve at the [Moscow Interbank Currency] Exchange." He said a record 4 trillion rubles ($757 million) coursed through the exchange Monday.

The surge is likely connected to foreigners gearing up for more active T-bill trading. According to new Central Bank rules that kick in Thursday, nonresidents will be allowed to buy and sell GKOs on the secondary market via special "S" accounts in one of 21 accredited banks.

In addition, Falkovich said, a reduction of banks' reserve requirements and a growth in the money supply in June and July helped lay the groundwork for a boost in demand for GKOs.

The average annualized yield for six-month GKOs tumbled to 80.4 percent from 106.12 percent at the previous auction Aug. 7. Nominal demand was 13.1 trillion rubles for the 8-trillion-ruble issue, and the Finance Ministry placed 6.6 trillion rubles of GKOs. The average price was 67.66 percent of par value, and the cutoff price was 67.45 percent.

The average annualized yield for the three-month GKOs was 63.86 percent, in line with secondary trading Tuesday but lower than the previous auction Aug. 7, which produced a 79.85 percent yield.

Nominal demand was 7.9 trillion rubles for the 3.5-trillion-ruble issue. The Finance Ministry placed 2.8 trillion rubles of GKOs at an average price of 81.96 percent of par and a cutoff price of 81.70 percent.