Bond Market Insight-Weekly review: seeking a lender of last resort

Last week, the MoF made an interesting move when it increased the rate it would accept on the primary market and changed the speculative tone on the market. Moreover, this week\'s expected decline in liquidity and the MoF\'s decisions on Thursday could have a further negative impact on rates and drive down all bond markets as well.

Local currency. The NBU continues to defend the UAH to keep it within a hair of 8/USD. Meanwhile, the Eurozone debt crisis intensified over the past several weeks, causing a broad rally in the US dollar, which eventually raised the real value of the UAH in real trade-weighted terms. As of the beginning of Monday, the UAH real trade weighted index stood at nearly 55, which is still below of the high of 57 reached in early October. It is becoming crucial for the local currency the kind of agreement that Ukraine and Russia will sign, and this will be known in the second week of December. Meanwhile, the critical IMF was sidelined by local authorities until this happens.

Domestic bond market. Although banking sector liquidity was stable last week, the NBU most likely supported last Thursday\'s primary bond auction as tax payments scheduled for the end of last week necessitated these funds. Also, the MoF significantly raised the primary market interest rates. This week, we could see the most aggressive rates in submitted bids so far this year.

Eurobond market. Ukrainian Eurobonds slightly fell last week on no significant news, most likely on anticipation of developing issues in Europe. All rates were 9.0-10.0% during the week, and the Ukrainian 5-year CDS was above 800bp. This week is expected to be the same, as we expect little progress in the European debt crisis as the Ukrainian situation stabilizes.