ICU Weekly Insight: Stronger Hryvnia and No Bond Rates Increase

Bonds: Finance ministry shows no interest in raising rates

The Ministry of Finance of Ukraine rejected more than half of the demand for military bills, as it refused to accept an increase in interest rates.

The demand at the primary bond auction last week improved from a week before—to UAH3.3bn for 1.5-year and UAH3.9bn for 2.5-year instruments. More than half of this demand came in with interest rates higher than those prevailing in the past several months.

Therefore, Ukraine’s finance ministry sold only UAH1.3bn and UAH1.9bn worth of these bonds, respectively. At the same time, the four-year note saw almost a 9x oversubscription, causing interest rates to fall by 130bp to 14.7%. See details in the auction review.

The focus of the secondary bond market was mostly on military and regular bonds, which accounted for 49% and 39% of total weekly turnover. Last week’s debt redemption led to a decline in portfolios of most investor groups, but they recovered slightly by the end of week.

ICU view: The domestic bond market remains segmented into two parts: 1. reserve bonds that are in high demand by banks, and 2. military and regular bonds that enjoy high demand from retail and corporate investors.

Banks are incentivized to buy reserve bonds due to the central bank-set reserve requirements, while non-bank investors show no interest in them due to lower yields that such bonds offer.

In addition, reserve bonds have longer maturities, while retail investors are interested in short securities with a remaining maturity of less than one year. We do not expect demand for military bonds will significantly exceed supply tomorrow.

At the same time, banks will compete for the four-year paper, which may soon be labelled as a designated reserve bond by the central bank.

Also, this week the NBU will hold its first Monetary Policy Committee meeting of 2025, and we expect an increase in the key policy rate of 50-100bp to 14-14.5%. However, it is difficult to say at this point whether the Ministry of Finance will be ready to raise rates on government bonds in response to monetary policy tightening.

Bonds: Volatility in Eurobond prices minimal

Ukrainian Eurobond prices fluctuated in a tight range last week, but rose slightly on Friday. For most of last week, prices stayed close to this year’s lows that were reached a week before.

But on Friday, the last business day before the inauguration of the new US President, prices moved up slightly. Overall for the week, the increase in prices was, on average, less than 1%. The EMBI index rose by 0.9%. VRI’s price rose by 0.8% to 81.2 cents per dollar of notional value, a new three-year high.

ICU view: Investors’ optimism improved slightly in anticipation of the inauguration of the new US President, which prevented a decline in Eurobond prices. Next week, we may expect official messages and/or statements about plans to end the war in Ukraine, which may have the decisive impact on investors’ sentiment and Eurobond prices.

FX: Ukraine’s central bank moves to strengthen hryvnia

Despite tightening imbalances in the FX market, weekly interventions by Ukraine’s central bank, the National Bank of Ukraine (NBU), remained almost unchanged at above US$1bn, which contributed to strengthening the hryvnia.

In four business days last week, net hard currency purchases declined by 13% WoW to US$702m, including US$448m in the interbank market (-1% WoW) and US$269m in the retail segment (27% WoW). While the total hard currency deficit declined by about 13%, the NBU decreased interventions only by 2% to US$1.01bn, strengthening the official hryvnia exchange rate by 0.4% to UAH42.13/US$.

ICU view: The National Bank continued to spend large amounts of its international reserves, seeking to calm the market and help stabilize the hryvnia exchange rate.

Generous interventions against the backdrop of lower market demand for hard currency helped stabilize the situation on the FX market, and strengthened the hryvnia exchange rate last week.

This stabilization should favour an increase in FX supply from exporters and a decline in the need for NBU interventions. We maintain our expectations that the hryvnia official exchange rate will not exceed UAH42.5/US$ in January, but will move in small steps to approximately UAH46/US$ by the end of the year.