Considerable yield growth of NBK’s notes

Halyk Finance ResearchJune 21, 2019

On 17 and 19 June 2019, the National Bank of Kazakhstan (NBK) placed short-term notes with a maturity of 3 months, 6 months and 1 year at the rates that were substantially higher than the rates of the previous placements. The rate on 3-month notes was 9.5% (previous placement in April at a rate of 8.8%), the rate on 6-month notes was 9.75% (past placement in May at a rate of 8.7%) and the annual rate - 9.95% (past placement in May at a rate of 8.92%). 

At the same time, we note that the market rates on money market instruments with a maturity of 1-7 days and the rates on long-term government securities remained virtually unchanged. Thus, the yield on bonds of the Ministry of Finance, with a maturity of 15 years placed on June 17, was 8.64% (on May 20, the Ministry of Finance placed these bonds at a rate of 8.64%). Whereas the rates in the one-day repo market with government securities are at 8.0% - 8.5%, the lower limit of the base rate band NBK), as it was before.

Our opinion

These actions of the NBK indicate the intention to increase market rates for money market instruments without changing the base rate by shifting market rates to the upper limit of its band. The increase in rates on the NBK notes with a maturity of 3 months to 1 year indicates a possible increase in rates for the shortest money market instruments, including one-day repos. In the absence of such changes, market participants will be able to make arbitrage transactions by raising funds at the shortest end of the curve (for example, in repos at 8.0– 8.5%) and placing them in notes at 9.5–10%. Saving the current curve for instruments with a maturity of up to 1 year, when the rates at the shortest end of the curve are 1.5-2.0 percentage points lower than the rates for annual instruments, is justified only in the event of waiting for a speedy and significant (at least 1 percentage point) raising market rates for the shortest instruments.

As per our expectations, such a significant increase in rates of return on short-term notes will significantly increase their attractiveness to investors and will lead to an increase in demand for these instruments from both non-residents and residents, who may begin to transfer funds from dollar assets to tenge. This, in turn, will support the national currency and allow the NBK to replenish its foreign exchange reserves. Subject to the stability of external economic conditions and maintaining market rates at the current level, we expect the national currency to strengthen.

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