Bond Market Insight-Weekly review: Ukraine\'s Eurobonds to rally alongside other assets as US debt issue resolves

This week is going to be a very interesting five days. It will begin on a high note as US lawmakers raise the US debt ceiling-a key factor that took the markets hostage over the past few weeks-a resolution which will redirect markets from a potential US default and downgrade to other issues. We expect other riskier assets like FX, equities, and EM fixed income to rally in response. Ukraine\'s sovereign debt should appreciate slightly, as we believe Ukraine\'s 5-year sovereign debt CDS, a proxy for risk premium attached to Ukraine\'s sovereign Eurobonds, will drop from 450bp of last Friday towards the range of 400-420bp by the end of this week, as the markets normalize and get past the possibility of a US technical default and any potentially devastating after-effects.

Local currency. The UAH has been trading in the local FX market very close to 8/USD, as it has over the last several years. Although the strengthening EUR and RUB this week could lead to a slightly weaker UAH in real terms, the NBU is quite wary of volatile foreign markets and could become even more defensive that it has been in the past. Hence, we see no major threat to move the nominal FX rate from the above-mentioned reference point of 8/USD.

Domestic bond market. In the local market, the MoF appeared to be avoiding primary placements as buyers demand higher yields. Last week\'s auction showed low investor participation combined with little interest in the government\'s desire to tap the market. This week\'s auction will likely be a repetition of the previous one. This is because government has some cash at hand oi its Treasury accounts and the nearest sizable UAH debt redemptions fall at the end of this month.

Eurobond market. On the Eurobond market, Fitch\'s recent positive credit rating reviews on Ukraine\'s issuers-from sovereign to municipal and corporate-provided a news flow for the secondary market bond trading. Eventually, prices on sovereign bonds rosein the past week. As the US debt issue appears resolved as ofthis Monday, Ukraine\'s Eurobonds are likely to gain as the risk premium attached to sovereigns still has room to catch-up with this year\'s best level of about 400bp. In this debt weekly, we add our comments on two names that have their Eurobonds trading in the high-yield zone - VAB and Finance and Credit Bank, which both are rated at the super-junk level Caa1 by Moody\'s.