Weekly review: Domestic bond market with erratic events

Although Ukrainian domestic bonds have been the main source of government funds, as exemplified by the MoF raising UAH3.6bn at the two primary auctions held last week, the EUR-denominated bond with put-option that debuted last week raised the most funds. Moreover, April\'s primary auction schedule will focus on FX bonds because the most attractive short-term bonds will be not offered this month.

Local currency. Although the UAH inched lower last week, it remained within the range approved by government authorities. While the currency\'s real trade-weighted value traded at its 12-month lows, having slowly depreciated since the beginning of 2012. Because of this, in this week\'s expected official reports on inflation, we expect Ukraine\'s YoY headline inflation to have decelerated by 0.9ppt, versus a much milder slowdown of 0.1ppt in Russia, Ukraine\'s largest trade partner.

Domestic bond market. Last week, there were two unusual developments in the domestic bond market. First, the MoF debuted the EUR-denominated bond with put-option, the terms of which were set only a week before and officially announced just last Monday. Second, for the first time in 2012, the MoF sold UAH700mn of 3-year USD-indexed bonds. In April 2012, we expect falling demand for local currency bonds because the MoF withdrew offerings of short-term bonds with under 12-month tenors from the primary auction schedule. Banking sector liquidity remained both stable and at high level last week, but slightly declined at the end of the week because of tax payments, which possibly caused the interest rate increase. High liquidity was supported by the MoF debt repayments and NBU CD redemptions.

Eurobond market. Ukrainian Eurobonds were slightly volatile and ended last week with YTMs rising to approximately 10.0%, possibly as the result of the last Thursday\'s Naftogaz announcement that it is going to receive a US$2.0bn, 7-year loan to Gazprombank, which could have a significant impact on Ukraine\'s credit outlook.
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