Bond Market Insight-Weekly review: market conditions get a bit tougher

Ukraine\\\\\\\'s fixed-income market has entered a period of risk aversion, due once again to both external factors as well as local ones, among which is that the promise made to IMF by the authorities to proceed with pension legislation this month is being tested. The first factor, which adds Japan\\\\\\\'s story onto the high oil price and slowing global economy into a single category of risk, is set to make Ukraine\\\\\\\'s assets a captive audience until the moment when financial markets more sensibly realize how the global economy will fare under the new conditions (when Japan\\\\\\\'s reconstruction kicks in, and the likely shock of the oil price\\\\\\\'s pressure on net importing economies in the interim). The second factor for Ukraine\\\\\\\'s fixed-income, the IMF, will unfold more vigorously during the upcoming two weeks, and will determine the market\\\\\\\'s future mood towards the local currency debt and yield levels.

Local currency. ICU TWIs, albeit rising 0.8% over the past week on the back of a weaker Russian ruble (the key trading partner for Ukraine), are still a fraction higher from the bottom of the last 10-month period. This breathes impetus into the view that weakness of the currency in trade-weighted terms, coupled with the impact on prices from a surge in the crude oil price, will put pressure on inflation to rise and the NBU to be very proactive fighting excesses in banking sector liquidity for the sake of taming inflation. Having said this, we acknowledge that a higher crude oil lays down prospects for a higher energy imports bill due to, among other factors, the natural gas price increasing towards US$300 per 1,000 cubic metres, according to a price formula attached to the Naftogaz-Gazprom supplies agreement. This may put pressure on imports to rise and demand for FX to rise, too, weakening the exchange rate nominally.

Domestic and Eurobond markets. So far so good-the local bond market has enjoyed not-so-bad prospects for another week during which the sovereign yield curve at least remains in the shape in which it was observed in recent days. Banking sector liquidity is again at decent level-UAH20bn is in banks\\\\\\\' accounts with the NBU, and UAH15bn is in the NBU\\\\\\\'s CDs, totaling UAH35bn, up from UAH29bn a week ago-which adds confidence that today\\\\\\\'s bond auction will face decent demand, which, we estimate to be around at least UAH1bn; furthermore, this volume is shaped by the notion that last month, the sizable amortisation payment on VATs (of UAH1.6bn) was not reinvested in full to the local-currency state bonds. The MoF needs to pay back UAH1.4bn this week on local debt, but the fact that it is not cash-strapped at all (with UAH7.8bn as of 1 March in the state treasury account) will tend to again make it quite selective, and it will likely avoid raising the yield on its new debt. On the local corporate bond market, Prominvestbank lowered yield guidance on its UAH500m, two-year bond to 12.5-13.5% YTM, which was logical from the standpoint of the issuer\\\\\\\'s credit quality, but this move may appear to be a victim of bad timing, as risk aversion to Ukraine\\\\\\\'s assets has firmed in recent days.