Bond Market Insight-Weekly review: a dull week ahead

Ukraine\'s bonds at home and abroad in the Eurobond market staged a poor performance last week. This is due to continuing unsteadiness in the international financial market, which awaits two factors: (1) the outcome of US debt ceiling talks, and (2) the Eurozone debt issue, particularly with suspicion over any overly optimistic calls on the matter, especially solutions to the Greek debt crisis that rely on EU banks\' stress test results. This week, beginning today, is no exception to last week. However, if breakthroughs are reached in Washington on debt ceiling and also in the EU on Greek debt talks, which are due to extend into this week as well, we could see more trustworthy bond performance. There were some signs of hope last week when Italy\'s lawmakers adopted an austerity package to re-gain the trust in the bond market and when US lawmakers appeared to be struggling to a compromise bill that would inevitably increase the debt ceiling. However, despite these some early signs of hope that the recent risk aversion might take a pause, we see no catalyst to expect anything but yet another dull week for Ukrainian bonds.

Local currency. The FX market last week repeated its usual shape, trading in the 7.98-8.00/USD range and ending the week at 7.99/USD last Friday, 14 July. Meanwhile, UAH real TWI (see Chart 1, pp.2) rose to 53.06 points, up 1.1% from the previous Friday\'s 52.29 points, due primarily to last week\'s prevailing risk aversion in the global financial markets that caused a flight of capital from EUR and EM currencies to the save heaven of US-denominated Treasuries. The recent rise of the US dollar, to which the UAH is de-facto pegged, has caused a rise of UAH real TWI during the past week. In our view, the NBU, with capacity and full lawmaker endorsement, will support the currency and prevent devaluation. Hence, we expect the UAH to end no higher than 8.00/USD at the end of this week.

Bond markets. Tomorrow, the MoF will auction four bonds (see Table 1, pp. 4). In our view, the auction could be cancelled as the redemption of local currency government bonds for the week is very modest. Moreover, banking sector liquidity is still restrained due to tighter NBU monetary policy. As for foreign demand, only the 2-year bond yield is above the NDF implied yield that would attract non-resident investors with hedged FX risk, which is the only such bond that could be sold tomorrow.