Bond Market Insight-Weekly review: Tight liquidity remains a key element in the local bond market

Ukraine\\\'s domestic and external bond markets have entered stormy territory, as sentiment darkened following allegations of technical difficulties at the MoF in making a scheduled debt repayment of nearly UAH5bn.

Local currency. The past week brought a standstill to investors\\\' perception towards risky assets, including towards the EM currencies, which were moving sideways through the week, as German MPs provided an antidote to the risk-off sentiment that was prevailing in the second half of the month. As of last Thursday, the RUB and EUR have reversed some slight portion of losses they suffered against the US dollar on the back of the above-mentioned sentiment, with the former rising versus the USD by 0.4%, while the latter upped by 0.7%. Hence, these moves also suppressed the recent rise of the UAH in trade-weighted terms.

Domestic bond market. There have again been visible signs of tightening in banking sector liquidity, as the NBU has likely reverted back to curbing inflation (official statistics on August headline and core CPI will be published this week), but at the same time, this worsened the financing conditions for the MoF. Last week, we once again observed a situation that has been commonplace for the past several weeks, during which time a drought in liquidity at banks was one of the prime reasons why the government\\\'s primary bond auction has largely failed, while the last one was left without demand at all. Also, last week the largest debt repayment of this year, of UAH4.9bn, was made in due course, though there was some noise in the media about allegations that the MoF was facing difficulties in making the payment (we provide our view on this issue below). Likely as the last chance to raise some funds from the local bond market, the government announced the new bond issuance programme, which has to do with issuing bonds linked to the USD/UAH spot exchange rate. Our view is that these new bonds will offer, from a short-term perspective, the same as mid-term bonds from the MoF currently, and thus will not meet large demand.

Eurobond market. The Ukrainian Eurobonds market continued falling last week, and likely, all plans for Eurobonds issues by the MoF and UKRINF will have to be postponed. As for the MoF, the funds on its FX accounts are enough to pay coupons and some principal repayments on the VTB loan, extending it to June of 2012, while UKRINF has to make its Eurobonds reopening, we believe, to collect funds for its current expenditures, as well as for a coupon payment this November.