Bond Market Insight-Government bond auction results: recent yield rise likely coming to a halt

In the bond auction on Tuesday, 13 April 2010 the government decided to stage a somewhat technical placement of its newly issued bonds at yields which were met with dismay by most bidders, leading to a token total amount of proceeds at the auction of UAH3.3m. However, the primary dealers, who are qualified to bid for the bonds on the primary market, provided a volume of bids (their own as well as their clients\') totaling UAH3.5bn with a 15-19% YTM range for a 6-month, 15-20% YTM for 350-day, 14.5-20% YTM for a 3-year, and 16-17.4% YTM for a 5-year note.

The eventual outcome of the auction was the MoF\'s refusal to make such a hefty concession to the market in terms of yield increase, resulting in its so-called technical placement of the newly issued bonds in order to launch their flotation and tap the issues in the near future. Such a technique was previously observed in early November last year, i.e., right after October\'s heavy borrowings by the MoF, amounting to UAH4.6bn, to finance the redemption of bonds that fell due in that period, giving the ministry the image of a boxer clinching his opponent in order to catch his breath.

While in November 2009, the MoF took a break after tapping the market with spiraling higher financing costs as YTMs of bonds placed moved beyond 25%, this time, the MoF has apparently hesitated in seeking proceeds from the market in order to overcome the recent rebound in financing costs, which began to grow late last month after dropping to nearly 12% in mid-March. This may appear a fruitful strategy by the ministry, as this week has been producing positive news flow, which ultimately pushed the market to reassess the credit risk of the sovereign, as Ukraine\'s 5-year CDS spread tightened to 555bp as of Tuesday from 615bp on last Friday. Add to this that the NDF market views much less depreciation potential for the local currency hryvnia than in the previous periods, and cozy words from the IMF head while commenting on cooperation with Ukraine\'s authorities on resumption of its lending programme. In addition, the Eurobond market has been opening up to corporate borrowers from Ukraine, with Ukreximbank, DTEK, and MHP all on road shows this week seeking debt financing.