ICU Bond Market Insight: August 31, 2022

FX Bills to the Rescue.

Yesterday, MoF borrowed almost UAH4bn (US$107m) for the budget. Only UAH323m (US$8.8m) was in local currency, and the rest was in hard currency.

Hryvnia bonds remain of little interest at the primary auctions. Although the volumes of demand and borrowings have increased slightly, they remain low with cautious attempts from market players to indicate the desired interest rate level.

While the highest rate in demand for four-month bills remained at 18%, for 10- and 13-month securities, maximum rates in demand decreased by 500bp and 700bp to 15% and 17%, respectively. But most of the bids were submitted with the usual interest rates, and they were accepted by the Ministry of Finance. Therefore, one bid with maximum rates for each paper was rejected.

Demand for FX-denominated bills again proved to be a saving grace for the budget. Thanks to these instruments, it was possible to raise almost US$100m equivalent, mostly in euros. Most bids were for shorter issues of USD-denominated bills, but in small volumes.

In addition, the Ministry of Finance offered bills with put options, which provided most of the proceeds: US$30.1m in US dollars and EUR50.2m in euros.

The Ministry of Finance used a similar tactic at the end of July, when it was possible to attract three times more funds, thanks to both hryvnia and FX instruments. Interest in the primary market showed a decrease since last week. Investors are looking for at least a minimal increase in rates for UAH bills or the possibility of early repayment of bills in hard currency.

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However, because sizeable redemptions of government bonds will take place as early as October, the Ministry of Finance is unlikely to take steps toward raising rates in the coming weeks so that investors will focus on the secondary market.

RESEARCH TEAM: Taras Kotovych.

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