ICU Weekly Insight June 27, 2022 – Fall in Eurobond prices accelerates

NBU provides budget financing again

Last week, the Ministry of Finance raised Hr 7.7bn ($261m) at the primary auction, mainly in hard currency, while the NBU again provided local-currency financing by  buying Hr 35bn ($1.2bn) worth of military bonds.

At the primary auction, demand was mainly concentrated in three-month securities, while semi-annual and 1.5-year bills received small bids.

The two issues of USD-denominated bills brought the vast majority of proceeds to the budget: $222m (Hr 6.5bn) out of Hr 7.7bn (US$261m) raised at the auction. See details in the auction review.

On the same day, the Ministry issued Hr 35bn ($1.2bn) of military bonds for the NBU, which compensated for low borrowings at the primary auctions in June.

The amount of funds the NBU provided for the budget via direct purchase of bonds rose to Hr 225bn ($7.6bn), of which Hr 105bn ($3.6bn) was provided in June.

In the secondary market, trading increased insignificantly, by just Hr 30m ($1m) to Hr 1.32bn ($45m). Foreign investors were back, and their portfolios grew last week by Hr 425m ($14m). Domestic banks increased their portfolios by Hr 315m ($11m), and individuals by Hr 292m ($10m).

At the same time, last week’s purchases did not fully compensate for the redemptions a week ago for any of these investor groups.

ICU view: Last week, the Ministry of Finance kept the yields on military bills unchanged and failed to attract much attention to paper denominated in hryvnia. Accordingly, this prompted the need to increase borrowings from the NBU, which carry a floating rate and significantly higher yields compared with bills offered in the primary market. At the same time, market rumours started to emerge that the Ministry of Finance would eventually agree to a gradual increase in yields on military bills offered in the primary market.

Bonds: Fall in Eurobond prices accelerates

Over the past week, the price of Ukrainian Eurobonds lost 8‒14%. From Monday to Wednesday, Eurobond prices fell relatively moderately by about 2-4%, or by less than one cent. But on Thursday, June 23, the market for Ukraine paper was in turmoil, and bonds lost 8 to 15 cents in just two days. So, last week ended with Eurobond prices mostly below 30 cents with the exception of Eurobonds maturing in 2022 and 2023, which ended at 63 and 36 cents, respectively. VRIs fell even more significantly by almost 16%, or 5.5 cents, to 28 cents per dollar.

ICU view: The risk-off attitude toward Ukraine debt continues to dominate among both institutional and private investors, due to, among other things, the uncertainties of the world economy caused by Russian aggression against Ukraine.

Information from the battlefields that the Ukrainian army was retreating in Donetsk Region and leaving several positions, including Severodonetsk, dominated the headlines of the global media and also prompted investors to assess Ukrainian risks more conservatively. These negative sentiments were not altered even by the last week’s approval of a long-term EUR 9bn loan to Ukraine by the European Council. These funds, probably in tranches, should reach the government’s accounts by the end of this year.

FX: Hryvnia exchange rate stable

The hryvnia exchange rate remains stable in the retail segment with small fluctuations.The USD/Hr exchange rate in banks edged down to Hr 34.6‒35.4/$ from Hr 34.9‒35.7/$ a week earlier, and the bid-ask spread remained at Hr 0.8. The exchange rate for card transactions, too, remained almost unchanged at Hr 30‒33/$.

In the interbank market, critical demand for hard currency hit on Tuesday, June 21 when the NBU had to sell $464m, or almost half of last week’s interventions totalling $933m.

ICU view: The cash market continues to fluctuate at reasonably normal levels with an unchanged spread between buy and sell prices. The market balance may remain close to current levels providing that no negative news emerges. On the interbank market, the NBU continues to sell as much hard currency as needed to fully balance the market and maintain the official exchange rate at a fixed pre-war level.

RESEARCH TEAM

Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych

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